Opinion
NOT FOR PUBLICATION
Argued and Submitted at San Francisco, California: January 22, 2009
Appeal from the United States Bankruptcy Court for the Eastern District of California. Bk. No. 04-20507. Honorable David E. Russell, Bankruptcy Judge, Presiding.
Before: JURY, MARKELL and HOLLOWELL, Bankruptcy Judges.
MEMORANDUM
Appellant-debtor, Todd S. Latin, appeals the bankruptcy court's order overruling his objection to the California State Board of Equalization's (" SBE") proof of claim filed in his chapter 13 case.
Because of debtor's pro se status, we liberally construe his pleadings. Kashani v. Fulton (In re Kashani), 190 B.R. 875, 883 (9th Cir. BAP 1995).
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, and to the Federal Rules of Bankruptcy Procedure, as enacted and promulgated prior to October 17, 2005, the effective date of most of the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, April 20, 2005, 119 Stat. 23 (" BAPCPA"), as debtor's case was filed in advance of the BAPCPA effective date.
The SBE's claim was based on a Notice of Dual Determination (" Notice"), which was filed prepetition under under Cal. Code Regs. Tit. 18, § 1702.6, assessing debtor $76,148.11 for Roseville Sunrise Restaurant, Inc.'s unpaid sales taxes. The basis of liability in the Notice was Latin's corporate officer status. Debtor objected to the claim on the ground that he resigned as an officer before the time period for which the taxes were assessed.
Citations to the Cal. Code Regs. Tit. 18, § § 1500 et al. will be referred to as " Regs." Reg. § 1702.6, titled " Suspended Corporations, " imposes personal liability for sales taxes on a corporate officer with control over operations or management of a closely held corporation during a time which the corporation is suspended or any responsible person who fails to pay any taxes due from a closely held corporation during a time in which the corporation was suspended.
The bankruptcy court overruled debtor's objection after an evidentiary hearing, finding him personally liable for the taxes not because he was an officer but because he had sufficient control over the business.
At the hearing on debtor's motion for reconsideration, the court clarified that its ruling was based on responsible person liability under Reg. § 1702.5, not corporate officer liability under Reg. § 1702.6, the legal ground for recovery asserted in the Notice and in the SBE's original proof of claim. Although the court found that debtor had resigned as a corporate officer, it reasoned that he was a " de facto officer" because he was involved in the business after his resignation. The court denied debtor's motion, concluding that he was a responsible person within the scope of Reg. § 1702.5 and liable for the taxes.
Reg. § 1702.5, which is titled " Responsible Person Liability, " imposes personal liability for a corporation's unpaid sales taxes on a responsible person who willfully fails to pay over the taxes to the government.
We hold that the bankruptcy court erred by applying the incorrect law in making its determination. The SBE's filed proof of claim did not give fair notice that it sought recovery against debtor's estate based on Reg. § 1702.5. As further explained below, analysis under Reg. § 1702.6 imposing personal liability on corporate officers for unpaid sales taxes is not identical to an analysis under Reg. § 1702.5, which imposes personal liability for the same types of taxes on responsible persons. Accordingly, we conclude that debtor's due process rights were violated because he was not given an opportunity to be heard on the responsible person theory of recovery.
We also conclude that the record supports a determination in debtor's favor under Reg. § 1702.6, the theory asserted by the SBE in its proof of claim. The bankruptcy court correctly placed the burden of proof by a preponderance of the evidence on debtor to establish that he was not a corporate officer during the relevant time period. Based on the uncontroverted evidence, the court found that debtor had resigned as a corporate officer on April 26, 2001, before the relevant time period. We thus hold that debtor met his burden of proof on that issue, thereby defeating an element of the SBE's claim against him under Reg. § 1702.6 for a significant portion of the time period for which the taxes were assessed.
Accordingly, we REVERSE.
I. FACTS
Debtor, his father Ed Latin, and business partner Milton Armistead incorporated Roseville Sunrise Restaurant, Inc. (the " Corporation") in California in 1996. Debtor served as an officer until he resigned on April 26, 2001.
On May 13, 2003, the SBE issued a Notice based on Reg. § 1702.6, assessing against debtor the liability for the Corporation's unpaid sales taxes incurred between April 1, 2001 and September 25, 2002. Debtor sought no redetermination.
Debtor filed his chapter 13 petition on January 20, 2004. The SBE filed its proof of claim, asserting an unsecured priority claim against debtor's estate based on the Corporation's unpaid sales taxes. Debtor objected to the claim on the ground that he did not owe any sales taxes.
Thereafter, the parties briefed whether the finality of the SBE's determination regarding debtor's liability for the sales taxes precluded the bankruptcy court from redetermining his tax liability. The SBE conceded that neither California preclusion law nor the Rooker-Feldman Doctrine was applicable.
Debtor also argued that he never received the SBE's Notice regarding the assessment. The bankruptcy court found, however, that debtor failed to rebut the presumption that he received the Notice because the SBE mailed it to his correct home address. The court also found:
[I]t is undisputed that corporate officer liability is the basis for the claim. The SBE asserts that debtor was an [sic] corporate officer of Roseville Sunrise Restaurant, Inc., during the period in which it operated as a suspended Corporation. Debtor disputes this fact arguing that he surrendered his position as a corporate officer prior to August 1, 2000. The court requires evidence to resolve this dispute.
The court conducted an evidentiary hearing on November 7, 2007. Debtor presented uncontroverted evidence of his signed resignation as a corporate officer dated April 26, 2001, and testified that he resigned for health reasons. The SBE presented evidence that debtor communicated with the SBE regarding the Corporation's tax liability and continued to sign checks issued from the Corporation's general account. Debtor contended, however, that the signature on some of the checks was not his.
The bankruptcy court overruled debtor's objection, explaining its reasoning in a brief oral decision. The court acknowledged that the burden of proof, which was preponderance of the evidence, was on the taxpayer-debtor. The court found that under this standard, debtor's evidence failed to prove that he was no longer involved in the business after his resignation. The court found that debtor's communications with the SBE led it to believe that it was dealing with someone who had authority to act on the Corporation's behalf.
The court further noted that, under California law, officers are responsible for a corporation's sales taxes when it is suspended. The bankruptcy court made no finding that debtor had resigned as a corporate officer before the time period for which the taxes were assessed, but stated, " I have no reason to disbelieve anyone's testimony...."
Debtor filed a motion for reconsideration (" Reconsideration Motion") on November 19, 2007. In his Reconsideration Motion, debtor argued that he presented uncontroverted evidence of his resignation as a corporate officer, which was effective upon written notice to the Corporation's board under California law. According to debtor, with no evidence to the contrary, he was not liable for the taxes under Reg. § 1702.6 because he was not a corporate officer. Debtor also maintained that the court erred in imposing responsible person liability on him under Reg. § 1702.5, which was not the legal ground for recovery asserted in the SBE's proof of claim.
In reality, Debtor's Reconsideration Motion was more in the nature of one for clarification of the court's prior ruling rather than based on any grounds for reconsideration set forth in Fed.R.Civ.P. 60(b), incorporated by Rule 9024.
At the hearing on debtor's Reconsideration Motion, the bankruptcy court made oral findings of fact and conclusions of law that supplemented those in its previous ruling. The court clarified that its prior ruling was based on responsible person liability under Reg. § 1702.5, not corporate officer liability under Reg. § 1702.6. The court opined that the issue before it was who was responsible for the taxes. The court stated that it did not consider it important whether the SBE relied on Reg. § 1702.5 or § 1702.6 in its proof of claim, especially since the SBE was unaware that debtor resigned as an officer until it conducted discovery. The court found that debtor resigned as an officer on April 26, 2001, but concluded that he was a " de facto officer" /responsible party based on the evidence.
The court denied debtor's Reconsideration Motion, acknowledging that its decision " would be different" if the SBE had proceeded solely under Reg. § 1702.6.
Debtor timely appealed. Thereafter, the bankruptcy court dismissed debtor's case for failure to make plan payments.
II. JURISDICTION
Because debtor's chapter 13 case has been dismissed, the question arises whether this appeal is moot. If an appeal is moot, we must dismiss if constitutionally moot, Drummond v. Urban (In re Urban), 375 B.R. 882, 887 (9th Cir. BAP 2007), and we may dismiss if equitably moot. Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25, 33-35 (9th Cir. BAP 2008). As discussed below, we conclude that this appeal is not moot and, therefore, consider the case on the merits.
The bankruptcy court had subject matter jurisdiction under 28 U.S.C. § 1334 over this core proceeding under § 157(b)(2)(B). We have jurisdiction under 28 U.S.C. § 158.
III. ISSUES
A. Whether the dismissal of debtor's chapter 13 case renders this appeal moot.
B. Whether debtor received fair notice of his potential liability as a responsible person who willfully failed to pay the Corporation's sales taxes under Reg. § 1702.5.
C. Whether the bankruptcy court erred in allowing the SBE's proof of claim, which was based on corporate officer liability under Reg. § 1702.6.
IV. STANDARDS OF REVIEW
" Mootness is a question of law reviewed de novo." Nelson v. George Wong Pension Trust (In re Nelson), 391 B.R. 437, 442 (9th Cir. BAP 2008).
We review de novo whether the bankruptcy court violated an individual's right to due process, which is a mixed question of law and fact. Duff v. United States Tr. (In re Cal. Fid., Inc.), 198 B.R. 567, 571 (9th Cir. BAP 1996). " In reviewing a mixed question, separate issues of fact are reviewed for clear error." Id.
We review de novo whether the bankruptcy court properly applied the burden of proof governing tax claims under Reg. § 1702.6. See Neilson v. United States (In re Olshan), 356 F.3d 1078, 1083 (9th Cir. 2004).
We also review legal issues such as the interpretation of statutes and rules de novo; factual findings are not disturbed unless they are clearly erroneous. Arnold v. Gill (In re Arnold), 252 B.R. 778, 784 (9th Cir. BAP 2000).
V. DISCUSSION
A. Mootness
The bankruptcy court dismissed debtor's chapter 13 case after he filed this appeal. The order dismissing his case is now final.
The dismissal of a bankruptcy case may render moot those matters closely connected with a debtor's reorganization, such as allowing a proof of claim. Bevan v. Socal Commc'ns. Sites, LLC (In re Bevan), 327 F.3d 994, 997 (9th Cir. 2003). We have an independent obligation to consider mootness sua sponte, Felster Publ'g v. Burrell (In re Burrell), 415 F.3d 994, 997 (9th Cir. 2005), because we lack jurisdiction, Urban, 375 B.R. at 887, or it may be the case that any remedy may be unjust given the change in position of third parties, Clear Channel, 391 B.R. at 33-35.
Since only claimants with allowed claims may participate in a distribution under a debtor's plan, allowing the SBE's claim is undoubtedly a matter closely connected with debtor's reorganization. Because debtor's case was dismissed, no creditor, including the SBE, will receive further distributions under his plan. But not all matters are " mooted simply because they touch on a bankruptcy proceeding or were adjudicated in it." Bevan, 327 F.3d at 997.
Debtor's Second Amended Plan, which was confirmed on December 3, 2004, listed the SBE's claim as disputed with an amount of " 0." Debtor listed the amount for his monthly plan payment as " varies": $4800 for the first six months, $600 for eighteen months starting August 2004, $825 for twenty-four months, $1050 for twelve months, and a $25,000 payment from either a refinance or family contribution before the end of the sixty-month plan. Despite debtor's treatment of the SBE's claim under his plan, his debt for the unpaid sales taxes may not have been subject to discharge under § § 1328(a)(2) and 507(a)(8)(C).
Allowing the SBE's claim is a ruling that follows from the issue being litigated in this appeal: whether debtor should be held personally liable for the Corporation's unpaid sales taxes because of his corporate officer status. We conclude that this determination is ancillary to debtor's bankruptcy. Therefore, the dismissal of his case does not necessarily cause this appeal to become moot. Spacek v. Thomen (In re Universal Farming Indus.), 873 F.2d 1334, 1335 (9th Cir. 1989).
Our primary inquiry in all mootness questions is whether we can give the appellant any effective relief if we decide the matter on the merits in his favor. If we can grant relief, the matter is not moot. Burrell, 415 F.3d at 998.
Here, the resolution of the merits could affect debtor's rights because " the allowance...of 'a claim in bankruptcy is binding and conclusive on all parties or their privies, and being in the nature of a final judgment, furnishes a basis for a plea of res judicata.'" Bevan, 327 F.3d at 997. If we affirm, the bankruptcy court's decision would have a res judicata effect that debtor would have to confront since his estate has revested in him. Therefore, we can give debtor effective relief if we decide the matter on the merits in his favor.
" The preclusive effect of a judgment is defined by claim preclusion and issue preclusion, which are collectively referred to as 'res judicata.'" Taylor v. Sturgell, 553 U.S. 880, 128 S.Ct. 2161, 2171, 171 L.Ed.2d 155 (2008).
Additionally, if debtor files another chapter 13, our failure to rule would preclude him from challenging any claim filed by the SBE based on Reg. § 1702.5 since the bankruptcy court's order would be final.
We conclude this appeal is not moot, and we retain jurisdiction over it.
B. The Merits
The bankruptcy court has authority to determine a debtor's tax liability. See § 505(a)(1). However, if a debtor's tax liability was contested and adjudicated by a tribunal of competent jurisdiction before the start of the bankruptcy case, the bankruptcy court loses its subject matter jurisdiction over the matter. See § 505(a)(2)(A); Mantz v. State Bd. of Equalization (In re Mantz), 343 F.3d 1207, 1211 (9th Cir. 2003). The record shows that debtor did not contest the SBE's determination of his tax liability before the start of his case. Accordingly, the bankruptcy court was not required by 28 U.S.C. § 1738 to give preclusive effect to the SBE's determination and had discretion to redetermine debtor's tax liability under § 505(a)(1). Id.
He claimed he did not receive notice, although the bankruptcy court ruled he did not rebut the " mailbox rule."
This statute provides that judicial proceedings ... " shall have the same full faith and credit in every court within the United States and its Territories and Possessions as they have by law or usage in the courts of such State, Territory or Possession from which they are taken."
Debtor contends that the bankruptcy court erred in determining his tax liability and allowing the SBE's claim primarily for two reasons. First, debtor maintains that the bankruptcy court erroneously imposed personal liability on him under Reg. § 1702.5 instead of Reg. § 1702.6, which was the original basis for the SBE's claim. As a result of this error, debtor contends that his due process rights were violated because he did not have fair notice that his liability for the taxes would be based on Reg. § 1702.5.
Second, debtor argues that the court erred in its ruling because the record supports a finding that he has no personal liability for the taxes under Reg. § 1702.6. He contends that the uncontroverted evidence showed that he resigned as a corporate officer as of April 26, 2001 and, therefore, he cannot be liable as an officer for the majority of the time period for which the taxes were assessed. We address each contention below.
1. The SBE's Prima Facie Claim Was Based on Reg. § 1702.6 and Not Reg. § 1702.5.
Under § 501, a creditor may assert debtor's liability to it by filing a proof of claim. A proof of claim is deemed allowed unless a party in interest objects under § 502(a) and constitutes " prima facie evidence of the validity and amount of the claim" under Rule 3001(f). See Rule 3007. Filing an objection to a proof of claim " creates a dispute which is a contested matter" within the meaning of Rule 9014 and must be resolved after notice and opportunity for a hearing. See Rule 9014, Adv. Comm. Note (1983).
A proof of claim is often analogized to a complaint. Heath v. Am. Express Travel Related Servs. Co. (In re Heath), 331 B.R. 424, 435 (9th Cir. BAP 2005); see also Rule 3001(a). " [T]he main purpose of the complaint is to provide notice of what plaintiff's claim is and the grounds upon which the claim rests....[the] plaintiff must at least set forth enough details so as to provide a defendant and the court with a fair idea of the basis of the complaint and the legal grounds claimed for recovery." Acequia, Inc. v. Clinton (In re Acequia, Inc.), 34 F.3d 800, 814 (9th Cir. 1994)(emphasis in original).
The SBE's proof of claim stated that it was for sales and use taxes for certain years but did not specify the precise legal grounds claimed for recovery of the taxes from debtor. A taxing entity's timely proof of claim enjoys prima facie validity under Rule 3001(f) without supporting documentation. State Bd. of Equalization v. L.A. Int'l. Airport Hotel Ass'n. (In re L.A. Int'l. Airport Hotel Ass'n.), 106 F.3d 1479, 1480 (9th Cir. 1997). The record reflects, however, that the SBE's claim was always based on its determination that debtor was liable for the taxes under Reg. § 1702.6 because of his corporate officer status.
The SBE's responsive pleading to debtor's objection to its proof of claim stated that it was based on debtor's corporate officer liability. The SBE attached a copy of Reg. § 1702.6 to its pleading. Moreover, the bankruptcy court's Civil Minute Order, dated August 14, 2007 provides: " [I]t is undisputed that corporate officer liability is the basis for the SBE's claim." At the hearing on debtor's Reconsideration Motion, the SBE's attorney stated on the record that the SBE's proof of claim was based on its determination under Reg. § 1702.6, and not Reg. § 1702.5.
Further, the SBE did not move to amend its proof of claim at any time during the proceedings, despite the available procedure to do so. At the hearing on debtor's Reconsideration Motion, the SBE's attorney stated that the SBE filed its claim based on debtor's corporate officer status because it did not become aware of his resignation as an officer until the matter went into litigation. Even then, however, it made no attempt to amend its claim to assert a new theory of recovery based on responsible person liability under Reg. § 1702.5.
While amendment of a proof of claim is discretionary with the court, long established liberal policy permits amendments to proofs of claim. Roberts Farms, Inc. v. Bultman (In re Roberts Farms, Inc.), 980 F.2d 1248, 1251 (9th Cir. 1992). Simply put, an amendment to its claim could have provided debtor with fair notice that the SBE sought to recover the taxes from him under Reg. § 1702.5.
On the other hand, a fair reading of the transcript on debtor's Reconsideration Motion shows that the SBE and debtor were equally surprised when the bankruptcy court clarified that its decision was based on responsible person liability under Reg. § 1702.5.
In sum, the record shows that the SBE did not explicitly or implicitly indicate in its pleadings or oral argument an intent to impose personal liability on debtor for the Corporation's unpaid sales taxes based on Reg. § 1702.5.
2. Debtor Did Not Have Fair Notice and an Opportunity to Defend Himself Against Liability Under Reg. § 1702.5
Debtor maintains that under these circumstances he reasonably assumed that he needed to rebut the presumption of the validity of the SBE's claim under Reg. § 1702.6 and not Reg. § 1702.5. Debtor contends he was prejudiced because he had no notice or opportunity to prove that he was not liable under Reg. § 1702.5. We agree.
" The fundamental requisite of due process of law is the opportunity to be heard." Dusenbery v. United States, 534 U.S. 161, 173, 122 S.Ct. 694, 151 L.Ed.2d 597 (2002). " This right to be heard has little reality or worth unless one is informed that the matter is pending and can choose for himself whether to appear or default, acquiesce or contest." Id . citing Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652, 94 L.Ed. 865 (1950). In Mullane, 339 U.S. at 314, the Supreme Court established the due process requirements for notice:
An elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and to afford them an opportunity to present their objections. (Citations omitted.) The notice must be reasonably calculated to convey the required information..., and it must afford a reasonable time for those interested to make their appearance[s].
Applying this standard, we conclude that debtor did not have adequate notice of his potential liability under Reg. § 1702.5. The lack of fair notice and an opportunity to defend is underscored by the differences between Reg. § § 1702.5 and 1702.6, each dealing with a totally independent liability.
Reg. § 1702.6, titled " Suspended Corporations, " imposes personal liability for sales taxes on (1) a corporate officer with control over operations or management of a closely held corporation during a time that the corporation is suspended, or (2) any responsible person who fails to pay or cause to be paid any taxes due from a closely held corporation during a time in which the corporation was suspended. The term " responsible person" means " any officer ... who is charged with the responsibility for the filing of returns or the payment of tax or who has a duty to act for the closely held corporation in complying with any provision of the Sales and Use Tax Law, and who derives a direct financial benefit from the failure to pay the tax liability." Reg. § 1702.6(b)(1)(emphasis added). The term " control over operations or management" means " the power to manage or affect day to day operations of the business." Reg. § 1702.6(b)(3). It is rebuttably presumed that a corporate officer has control over operations and management of the closely held corporation. Reg. § 1702.6(b)(3).
In contrast, Reg. § 1702.5, titled " Responsible Person Liability, " applies when the sales taxes are not paid upon termination, dissolution, or abandonment of the corporate business and contains two requirements: the taxpayer must be (1) a responsible person who (2) willfully fails to pay the taxes to the government.
The term " responsible person" in Reg. § 1702.5 has a broader definition than the one provided under Reg. § 1702.6. A responsible person may be an officer, but also may be a " member, manager, employee, director, shareholder, or other person having control or supervision of, or who is charged with the responsibility for, the filing of returns or the payment of tax or who has a duty to act for the corporation ... in complying with any provision of the Sales and Use Tax Law...." Reg. § 1702.5(b)(1).
Further, in contradistinction to Reg. § 1702.6, the touchstone for being a responsible person under Reg. § 1702.5 is whether the individual being assessed possessed a sufficient degree of authority over corporate decision-making to make him a responsible person. In re Pugh, 315 B.R. 889, 897 (Bankr. D. Nev. 2004)(finding in the context of 26 U.S.C. § 6672 that whether a party qualifies as a responsible person is a matter of his status, duty, and authority).
Under Reg. § 1702.5(b)(2), willful means " voluntary, conscious and intentional." The Regulation elaborates: " A failure to pay or to cause to be paid may be willful even though such failure was not done with a bad purpose or evil motive." Id .; See also Tax Code § 6829(d). Whether the responsible person " willfully refused" to pay the tax is a factual question. Teel v. United States, 529 F.2d 903, 905 (9th Cir. 1976).
Reg. § 1702.5 references Tax Code § 6829. Tax Code § 6829(d) provides: " For purposes of this section willfully fails to pay or to cause to be paid means that the failure was the result of an intentional, conscious, and voluntary course of action...."
Moreover, Tax Code § 6829(b) provides: " The officer, member, manager, partner, or other person shall be liable only for taxes that became due during the period he or she had the control, supervision, responsibility, or duty to act for the corporation ... described in subdivision (a), plus interest and penalties on those taxes...." (Emphasis added.) The bankruptcy court made no finding on the record indicating that it considered this subsection of § 6829 in its ruling.
In short, the two Regulations contain different requirements, definitions, and presumptions. Accordingly, the evidence needed to defend each of the requirements in the two Regulations further illustrates the importance of proper notice because debtor bore the burden of proving by a preponderance of the evidence that at least one of the requirements was not present. See Tax Code § § 6091, 6042; see also S. Coast Co. v. Franchise Tax Bd., 250 Cal.App.2d 822, 58 Cal.Rptr. 747 (1967); The Flying Tiger Line v. State Bd. of Equalization, 157 Cal.App.2d 85, 99, 320 P.2d 552 (1958).
Tax Code § 6091 provides: " For the purpose of the proper administration of this part and to prevent evasion of the sales tax it shall be presumed that all gross receipts are subject to the tax until the contrary is established." Tax Code § 6241 provides: " For the purpose of the proper administration of this part and to prevent evasion of the use tax and the duty to collect the use tax, it shall be presumed that tangible personal property sold by any person for delivery in this State is sold for storage, use, or other consumption in this State until the contrary is established. The burden of proving the contrary is upon the person who makes the sale unless he takes from the purchaser a certificate to the effect that the property is purchased for resale."
Debtor's defense to the Reg. § 1702.6 charge was proof by a preponderance of the evidence that he was not an officer of the Corporation during the relevant time period who was in control over its operations and management or an officer charged with the responsibility for filing returns or paying the taxes. In each instance, the taxpayer's liability rests on corporate officer status. In contrast, Reg. § 1702.5 required evidence to prove the elements of responsibility and willfulness were not present.
Therefore, based on the differences between the two Regulations, we respectfully disagree with the bankruptcy court's view that it was not important which Regulation the SBE relied on for its proof of claim. While debtor raised the argument regarding his lack of notice in his Reconsideration Motion, the court did not analyze this argument. Instead, the transcript of the hearing shows the court simply clarified its earlier ruling by providing additional findings of fact and conclusions of law. In the end, debtor never received a meaningful hearing of his arguments against liability under Reg. § 1702.5.
The SBE contends that debtor had adequate notice that his " willful" failure to pay the taxes was at issue because it argued in its opposition to debtor's objection " not only was the debtor apparently an officer of the corporation, he acted on behalf of the corporation with regard to the corporation's tax liability in communications with the SBE." We disagree that this one sentence buried in a pleading was notice reasonably calculated to apprise debtor that he faced responsible person liability under Reg. § 1702.5.
Nowhere does the SBE mention Reg. § 1702.5 in any of its pleadings, and it did not attach a copy of Reg. § 1702.5 to its opposition as it did a copy of Reg. § 1702.6. Furthermore, the SBE never argued in the bankruptcy court that debtor's failure to pay the taxes was " willful" within the meaning of Reg. § 1702.5, nor did it cite any case law to support that position.
In determining debtor's personal liability under Reg. § 1702.5, the bankruptcy court made no ruling on the willful element; there was no discussion of that element on the record. The SBE suggests that we should infer such a finding based on the evidence. However, neither the SBE nor debtor introduced any evidence on this element. Accordingly, we cannot imply a finding of willfulness that the record does not support.
In sum, we hold debtor's due process rights were violated when the bankruptcy court imposed personal liability on him for the Corporation's unpaid sales taxes under Reg. § 1702.5. The SBE neither relied on nor argued for liability under that Regulation in connection with its proof of claim. Nor can we conclude from this record that debtor impliedly consented to trial on the issue of whether he was a responsible person under Reg. § 1702.5 just because evidence introduced at the evidentiary hearing was incidentally relevant to the liability imposed under both Reg. § § 1702.5 and 1702.6. See Acequia, Inc., 34 F.3d at 814 (" Where 'evidence ... allege[d] to have shown implied consent was also relevant to the other issues at trial[, ] [it] cannot be used to imply consent to try the [unpleaded] issue.'")(emphasis in original).
In light of our conclusion, it is unnecessary to address debtor's arguments regarding his liability as a " de facto" officer under Reg. § 1702.5.
3. Liability Under Reg. § 1702.6
Reg. § 1702.6 imposes personal liability on corporate officers when (1) the officer has control over operations or management of a closely held corporation during a time which the corporation is suspended, or when (2) the officer is charged with the responsibility for the payment of tax.
Debtor had the burden of proving that he was not a corporate officer during the relevant time period for which the taxes were assessed. Debtor's uncontroverted evidence met this requirement when he introduced written evidence of his resignation and testified that he had resigned for health reasons.
Furthermore, under California law, debtor's resignation became effective on written notice to the Corporation. As a general rule, officers may resign at will, and the validity of their resignation does not depend on its formal acceptance. Sec. Investors Realty Co. v. S.Ct. of L.A. County, 101 Cal.App. 450, 453, 281 P. 709 (1929).
Cal. Corp. Code § 305(d) provides: " Any director may resign effective upon giving written notice to the chairman of the board, the president, the secretary or the board of directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation...." Cal. Corp. Code § 312 entitled " Officers; election; term; resignation", subsection (b) provides in relevant part: " Any officer may resign at any time upon written notice to the corporation ...."
The parties to this appeal cite no law, and we could not find any, that supported the bankruptcy court's conclusion that debtor was obligated to notify the SBE of his resignation. Neither the Tax Code nor the Regulations indicate that such a notice is mandatory in order to escape personal liability for a corporation's unpaid sales taxes. Thus, we respectfully disagree with the bankruptcy court's conclusion that debtor had to advise the SBE to make his resignation effective.
We also cannot conclude on this record that debtor's failure to give notice to the SBE regarding his resignation constituted " fraud" - a term used by the bankruptcy court. Clear and convincing evidence must be shown to establish civil tax fraud under California law. Cal. State Bd. of Equalization v. Renovizor's, Inc. (In re Renovizor's, Inc.), 282 F.3d 1233, 1235, 1241 (9th Cir. 2002). Clear and convincing evidence means evidence sufficient to support a finding of " high probability." See Cal. Civ. Code § 3294(a); Waits v. Frito-Lay, Inc., 978 F.2d 1093, 1105 (9th Cir. 1992), cert. denied, 506 U.S. 1080, 113 S.Ct. 1047, 122 L.Ed.2d 355 (1993). We cannot determine from this record whether debtor's silence met this heightened standard.
The court found that debtor had resigned as a corporate officer based on debtor's written evidence of his resignation and testimony. Under California law, his resignation was effective upon written notice. Therefore, the bankruptcy court should have sustained debtor's objection and disallowed the SBE claim because it lacked an essential element for imposing personal liability on debtor for a portion of the Corporation's unpaid sales taxes.
VI. CONCLUSION
We conclude that the bankruptcy court erred for the reasons stated above. Debtor did not have fair notice that he faced liability under Reg. § 1702.5, which was the basis for the bankruptcy court's allowance of the SBE's claim.
We express no opinion as to whether debtor is actually liable for the Corporation's unpaid sales taxes based on Reg. § 1702.5.
We also hold that debtor met his burden of proof that he was not an officer of the Corporation after April 26, 2001. Therefore, the SBE's claim, which was based on Reg. § 1702.6, should have been rejected by the bankruptcy court because an essential element for imposing personal liability on debtor for a portion of the Corporation's unpaid sales taxes was not met.
Accordingly, we REVERSE.