Athar v. State Board Of Equalization

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UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
SAN FERNANDO VALLEY DIVISION
In re:
Sayeda H Athar
Debtor(s).
CHAPTER 7
Case No.: 1:11-bk-23947-MT
Adv No: 1:12-ap-01038-MT
Sayeda H Athar
Plaintiff(s),
v.
State Board Of Equalization
Defendant(s).
MEMORANDUM OF DECISION RE:
TRIAL TO DETERMINE
DISCHARGEABILITY OF TAX DEBT
MEMORANDUM DECISION AFTER TRIAL
This matter arises out of the dispute between discharged Chapter 7 debtor and Plaintiff,
Sayeda Athar (“Athar”), and Defendant tax creditor State Board of Equalization (“BOE”) on the
issue of whether the Chapter 7 discharge in the main proceeding was effective against her sales
tax liabilities arising out of the operation of a store known as “Quick Mart,” or whether those tax
obligations were excepted from discharge pursuant to 11 U.S.C. § 523(a).
The matter has been tried and submitted for decision. At trial, Athar testified and BOE
offered the testimony of Ross Masaki (“Masaki”). The central issue during trial was whether
Athar was legally a general partner of Quick Mart.
FILED & ENTERED
FEB 27 2014
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	Gonzalez
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PROCEDURAL HISTORY
On December 2, 2011, Athar filed for Chapter 7 Bankruptcy. See Bankruptcy Case no.
1:11-bk-23947-MT, Docket no. 1. Athar received discharge on March 14, 2012. On January 31,
2012, Athar filed this adversary against Defendant BOE seeking declaratory relief as to whether
the tax debt had been discharged. See Adversary Proceeding no. 1:12-ap-01038-MT, Docket no.
1. The adversary alleged there was an actual controversy over whether Athar was liable for
Quick Mart sales taxes collected and not turned over and whether the taxes were non-
dischargeable. Athar claimed that she did not owe the taxes because she never collected any sales
tax and the taxes measured on income were dischargeable under 11 U.S.C § 507. On May 16,
2012, BOE filed its answer to the adversary complaint claiming that the taxes were owed and
nondischargeable. See Id. Docket no. 8. The Revised Joint Trial Order (“Pre-trial Order”) was
filed January 22, 2013. See Id. Docket no. 16. Originally, the trial was scheduled to be heard on
November 21, 2013, before the Honorable William V. Altenberger. However, the trial date was
vacated and set for January 14, 2014 before the Honorable Maureen Tighe. See Id. Docket no. 27
and 29. The trial was held on January 14, 2014.
FINDINGS OF FACT1
On July 18, 2001, Athar and her father, Mustafizur Rehman (“Rehman”), signed a written
Form BOE- 400 Application for a California Retail Seller’s Permit (“BOE Application”) for the
operation of a convenience store, “Quick Mart”. See Trial Exhibit 1 (Application for Sellers
Permit and Registration as a Retailer). Under the heading of “Ownership and Organization
changes”, Quick Mart’s application indicated that Athar was a partner in Quick Mart. Id. Quick
Mart was a convenience store engaged in the business of selling food and beverages.
On July 19, 2001, a Fictitious Business Name Statement was recorded in Los Angeles
County Official Records over the signatures of Athar and her father, which stated that the
“following persons . . . are . . . doing business as: Quick Mart.” See Trial Exhibit 2 (Fictitious
Name Statement). The registrants listed were Athar and her father. Id.
On August 30, 2001, Athar was listed as the primary owner of Quick Mart on the beer
and wine license for the California Department of Alcohol Beverage Control (“ABC”). See Trial
Exhibit 3 (California Department of Alcohol Beverage Control License Query System
Summary).
On or about December 18, 2009, BOE issued Notices of Determination of sales tax
liability (“NOD #1”) to Athar, as well as to Quick Mart and her father, Rehman. See Trial
Exhibit 4 (State of California Board of Equalization Notice). BOE determined that $86,430.69 in
sales taxes was owed as a result of the operation of Quick Mart. Id.
1 The following findings of fact and legal conclusions constitute the court’s findings under Federal Rule of Civil
Procedure 52(a), applicable in this bankruptcy proceeding under Federal Rule of Bankruptcy Procedure 9014. To
the extent any findings of fact constitute conclusions of law, they are adopted as such. To the extent that any of the
conclusions of law constitute findings of fact, they are adopted as such.
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On June 2, 2011, Athar’s father, Rehman, passed away. On August 16, 2011, Athar
signed over Power of Attorney to Aminul Islam (“Islam”) to represent Quick Mart and herself
before BOE. See Exhibit 8 (State Board of Equalization Power of Attorney).
On December 2, 2011, Athar listed the California beer and wine license as her own
property on her Chapter 7 schedules. See Trial Exhibit 10 (Voluntary Petition) pg. 14, 22, and
26.
On February 23, 2013, the BOE issued and served a written Decision and
Recommendation that found that Athar was a general partner in Quick Mart. The BOE issued a
Notice of Redetermination (the “NOR”) to Athar as a partner on the earlier 2005 – 2008 audit
liability on October 15, 2012. That assessment became final on November 14, 2012.
Athar formally closed out the BOE permit on March 12, 2012, with an effective closing
date of June 30, 2011. See Trial Exhibit 13 (Notice of Closeout for Sellers Permit). Athar failed
to notify or advise the State Board of Equalization that she was not a partner in Quick Mart, until
after Quick Mart went out of business.
At the trial on direct examination, Athar testified that she did not know that the Form
BOE application she signed listed her as a “Partner”. She testified that she had not read the
designation of “Partner” that appeared next to her signature on the BOE Application at the time
she signed the Application. Athar claimed her father needed her to sign the documents because
she had better credit and he needed her to sign to get a business license.
Throughout the trial, Athar testified that she did not have the authority or discretion as a
partner to determine what obligations Quick Mart would pay or whether or not Quick Mart’s
State Board of Equalization sales tax obligations would be paid. She believed she had no duty or
responsibility as a partner to act for Quick Mart with respect to the filing of quarterly tax returns
during the relevant period. She did not willfully fail to pay or cause to be remitted any Quick
Mart collected taxes due to the State Board of Equalization.
On cross-examination, she testified that the sequence of events was as follows: (1) Her
father talked to her about needing her signature on the document; (2) he then filled out the
document; and (3) Athar then signed the original of the document. Athar testified she did this
because she knew he needed it for his business and she always wants to help her family.
Athar also testified that she could not recall reading any of the statements and schedules
that accompanied her Chapter 7 Petition when it was filed with the Court. In fact, she could not
recall reading any of the documents among the Trial Exhibits that bear her signature, although
she admitted signing each of them. With the exception of the bankruptcy filings, Athar’s
testimony was that she signed each of Trial Exhibits that bear her signature because she believed
her signing them would help her family.
Athar testified in English at trial. She admitted that she can read and write in English. She
once worked as a store employee for Sears, and she successfully passed her California DMV
written examination for her driver’s license in English on the third try. While English clearly was
a second language, her English was adequate, and she appeared to understand the questions
asked. Her answers were responsive except when the conclusions to be drawn from those
answers were not consistent with her theory of liability. She was credible that she was not
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involved in the day to day running of the business and that she followed the advice of others to
do a favor for her family.
The BOE offered the testimony of Ross Masaki (“Masaki”). The California State Board
of Equalization has employed Masaki for the past 15 years. His current position is a Business
Tax Compliance Specialist working in the Special Operations Bankruptcy Unit. Masaki monitors
bankruptcy cases filed by BOE permit holders. He reviews their bankruptcy cases to ensure
compliance with BOE regulations and that the state interests are taken care of. Masaki was
familiar with BOE procedures for issuing licenses.
Masaki testified that once BOE received the Quick Mart application, it processed the
application as a general partnership and issued a sellers permit that is required to do business.
The BOE relied on Athar’s representations that she was a partner of Quick Mart in issuing the
license because the BOE treats all information in an application as true and correct and relies on
the statements in the application when issuing permits. Masaki testified that the BOE relied that
the individuals listed on the BOE application were partners, doing business as Quick Mart and
running the business of selling beer and wine as a general grocer. He said the BOE permit was
categorized as a general partnership and Athar and her father listed as partners. Masaki claimed
that BOE relies on the “partner” designation to determine who is liable for the tax debt and who
is responsible for filing tax returns.
During trial, BOE presented evidence that as of the date of Rehman’s death, Athar:
Gave her cousin Aminul Islam a formal Power of Attorney to represent Quick Mart
and herself before BOE on August 16, 2011;
Assumed control of the physical assets of Quick Mart;
Formally closed out the BOE sales permit on March 2, 2012;
Attempted to sell Quick Mart as a going concern;
Assumed ownership and control of Quick Mart’s ABC beer and wine license;
Filed a request with BOE for relief from penalty, collection costs, and interest on
October 14, 2011, which states under penalty of perjury: “[W]e have been trying to
sell the business . . . The sooner this gets compromised and settled the sooner we
can sell the business . . . We had tried to sell the business . . .”; and
Listed one or more assets of Quick Mart in the schedules of property filed in her
subsequent Chapter 7 proceeding, including the ABC beer and wine license.
See Trial Exhibits 7-14 and BOE’s Trial Brief pg. 7.
CONCLUSIONS OF LAW
According to the Pre-Trial Order there were seven legal issues to be litigated at trial. See
Adversary Docket no. 16. During trial, Athar alleged several theories as to why she should be
excused from the BOE tax liability. However, there was no evidence presented during trial or in
her closing argument to legally support these assertions, and Athar did not argue or present
evidence concerning most of the issues delineated in the Pre-trial Order. The legal issues from
the Pre-Trial Order argued during trial were 1) whether Athar is estopped from denying that she
was a partner in Quick Mart due to her written representations made to the BOE that she was a
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partner, and her failure to notify the BOE that she was not a partner while the business continued
to operate and 2) whether Athar owes any taxes at all to BOE. Thus, the central issue is whether
Athar was considered a partner of Quick Mart and is liable for the state tax obligation incurred
by Quick Mart.
California Corporations Code § 16308 Purported Partner
“Except with respect to registered limited liability partnerships and foreign limited liability
partnerships:
(a) If a person, by words or conduct, purports to be a partner, or consents to being
represented by another as a partner, in a partnership or with one or more persons
not partners, the purported partner is liable to a person to whom the representation
is made, if that person, relying on the representation, enters into a transaction with
the actual or purported partnership. If the representation, either by the purported
partner or by a person with the purported partner's consent, is made in a public
manner, the purported partner is liable to a person who relies upon the purported
partnership even if the purported partner is not aware of being held out as a
partner to the claimant. If partnership liability results, the purported partner is
liable with respect to that liability as if the purported partner were a partner. If no
partnership liability results, the purported partner is liable with respect to that
liability jointly and severally with any other person consenting to the
representation.
(b) If a person is thus represented to be a partner in an existing partnership, or
with one or more persons not partners, the purported partner is an agent of
persons consenting to the representation to bind them to the same extent and in
the same manner as if the purported partner were a partner, with respect to
persons who enter into transactions in reliance upon the representation. If all of
the partners of the existing partnership consent to the representation, a partnership
act or obligation results. If fewer than all of the partners of the existing
partnership consent to the representation, the person acting and the partners
consenting to the representation are jointly and severally liable.
(c) A person is not liable as a partner merely because the person is named by
another in a statement of partnership authority.
(d) A person does not continue to be liable as a partner merely because of a
failure to file a statement of dissociation or to amend a statement of partnership
authority to indicate the partner's dissociation from the partnership.”
Cal Corp Code § 16308
Under California’s Uniform Partnership Act of 1994 (“UPA”), Cal. Corp. Code § 16100
et seq., liability for the debts of a partnership may be premised on an actual partnership pursuant
to Cal. Corp. Code § 16202, or partnership by estoppel pursuant to Cal. Corp. Code § 16308(a).
Once partnership is established, Cal. Corp. Code § 16308(a) provides that, unless otherwise
agreed by the claimant or provided by law, all partners are jointly and severally liable for all
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partnership obligations. Cal. Corp. Code § 16308(a). Whether a partnership exists is a question
of fact to be determined by the trial court. In re Lona, 393 B.R. 1, 3 (U.S. 2008). In California,
the burden of proving a partnership is on the party alleging it. Id.
In California, “[t]he association of two or more persons to carry on as co-owners of a
business for profit forms a partnership, whether or not the persons intend to form a partnership.”
Cal. Corp. Code § 16202(a). In re Tsurukawa II, 287 B.R. at 521. Additionally, being passive in
business dealings does not prevent a finding of partnership. "[A] partnership can exist as long as
the parties have the right to manage the business, even though in practice one partner
relinquishes the day-to-day management of the business to the other partner." In re Tsurukawa II,
287 B.R. at 522 (citations omitted).
The rule of responsibility and liability of one held out as a partner is founded upon the
equitable doctrine of estoppel. Dodd v. Tebbetts (1926) 198 Cal 333, 244 P 1081. Whether one is
an ostensible partner depends on whether his acts and conduct are factually and legally sufficient
to lead another to believe he is partner and has assumed responsibility as such. J. C.
Wattenbarger & Sons v. Sanders (1963) Cal App 5th Dist, 216 Cal App 2d 495, 30 Cal Rptr 910.
[C]ourts interpreting other states' partnership statutes have held that a partner is liable for
the partnership's unpaid taxes even though the partner was not personally responsible for paying
those taxes. See Livingston v. United States, 793 F. Supp. 251, 254 (D. Idaho 1992) (applying
Idaho law, and rejecting argument similar to Debtors' argument in this case); In re Norton, 158
B.R. 834 (Bankr. D. Idaho 1993) (applying Utah law and following Livingston). State Bd. of
Equalization v. Leal (In re Leal), 366 B.R. 77, 82 (U.S. 2007).
Signing in ignorance of contents
“First, the law effectively presumes that everyone who signs a contract has read it
thoroughly, whether or not that is true. A basic rule of contract law is, “ ‘in the
absence of fraud, overreaching or excusable neglect, that one who signs an
instrument may not avoid the impact of its terms on the ground that he failed to
read the instrument before signing it.’ ” (Stewart v. Preston Pipeline Inc. (2005)
134 Cal.App.4th 1565, 1588, 36 Cal.Rptr.3d 901.) [C]ourts must also presume
parties understood the agreements they sign, and that the parties intended
whatever the agreement objectively provides, whether or not they subjectively
did: “ ‘Where the parties have reduced their agreement to writing, their mutual
intention is to be determined, whenever possible, from the language of the writing
alone.’ ... ‘[T]he parties' expressed objective intent, not their unexpressed
subjective intent, governs.’ ” (In re Tobacco Cases I (2010) 186 Cal.App.4th 42,
47, 111 Cal.Rptr.3d 313.) And finally, in perhaps the biggest legal fiction of all,
we are required to presume that parties to a contract both know and have in mind
“ ‘all applicable laws in existence when an agreement is made ... necessarily enter
into the contract and form a part of it, without any stipulation to that effect, as if
they were expressly referred to and incorporated.’ ” (Swenson v. File (1970) 3
Cal.3d 389, 393, 90 Cal.Rptr. 580, 475 P.2d 852.).”
Roldan v. Callahan & Blaine, 219 Cal. App. 4th 87, 93-94, 161 Cal. Rptr. 3d 493, 497-98 (2013).
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Partnership Between Athar and Rehman
Based on Athar’s testimony and the surrounding circumstances as a whole, the Court
finds BOE has sustained its burden of proving that the tax was properly imposed based on its
partnership findings.
Actual Partnership
Athar argues that a partnership requires intent and that there was no intent to form a
partnership with her father. She alleges she had no control over the business; therefore she
should have no tax liability. She claims BOE is making her liable on a technicality because she
signed the BOE application which had the words partner written beside her name.
The United States Supreme Court has long held that intent is not required to form a
partnership:
“A person who is not in fact a partner, who has no interest in the business of the
partnership and does not share in its profits, and is sought to be charged for its
debts because of having held himself out, or permitted himself to be held out, as a
partner, cannot be made liable upon contracts of the partnership except with those
who have contracted with the partnership upon the faith of such holding out. In
such a case, the only ground of charging him as a partner is that, by his conduct in
holding himself out as a partner, he has induced persons dealing with the
partnership to believe him to be a partner, and, by reason of such belief, to give
credit to the partnership.
Thompson v. First Nat. Bank of Toledo, Ohio, 111 U.S. 529, 536-37, 4 S. Ct. 689, 692, 28 L. Ed.
507 (1884).
Pursuant to the UPA, ‘[T]he association of two or more persons to carry on as co-owners
a business for profit forms a partnership, whether or not the persons intend to form a
partnership.’ Cal. Corp. Code § 16202(a). In re Lona, 393 B.R. 1, 14-15 (U.S. 2008). “The fact,
however, that profits and losses are not shared equally does not necessarily compel a conclusion
that no partnership existed. Constans v. Ross, 106 Cal. App. 2d at 389. Nor does the unequal
apportionment of management duties compel a conclusion of no partnership. Id.; Associated
Piping & Eng'g v. Jones, 17 Cal. App. 2d at 111. It is immaterial if the parties do not designate
their relationship as a partnership or if they do not know that they are partners, for intent may be
implied from their acts. Id. at 110 (citations omitted); Thompson v. O.W. Childs Estate Co., 90
Cal. App. 552, 554, 266 P. 293 (Cal. Dist. Ct. App. 1928) (citation omitted)”. In re Lona, 393
B.R. 1, 14-15 (U.S. 2008).
The issues are not whether Athar intended to form a partnership with her father or
whether she knew what the documents she was signing were. The issue does not depend on who
had control of Quick Mart or even whether Athar was an active partner.
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Where the rights of a third party are involved, the fundamental question is whether, based
on the conduct of the alleged partners, the third party had a right to believe that a partnership
existed. In re Lona, 393 B.R. 1, 14-15 (U.S. 2008) citing Hansen v. Burford, 212 Cal. 100, 110,
297 P. 908 (Cal. 1931); Associated Piping & Eng'g v. Jones, 17 Cal. App. 2d 107, 111, 61 P.2d
536 (Cal. Dist. Ct. App. 1936).
Under California law Athar was a partner of Quick Mart. Athar signed all the documents
required to start and close the business. It is undisputed that Athar signed an application that
represented to the BOE that she was a “partner” in Quick Mart, and a similar representation was
made to another California state agency, for the purpose of obtaining permits and licenses to
allow Quick Mart to operate legally. A fictitious business name statement was also filed for
Athar and her father in Los Angeles County records for Quick Mart. In addition, the NOD issued
by the BOE was addressed to Mr. Rehman, to Quick Mart, and to Athar herself, stating that
liability was assessed “to the partnership under which the account [was] registered and to each of
the partners of the partnership.”
In this case, intent to form a partnership is implied through Athar’s actions. She testified
that she signed the documents to help her father because she always wanted to help her family.
Athar may have been operating under the assumption that she was just helping her family by her
actions without realizing the legal consequences, but that does not eliminate her liability as a
partner. She held herself as a general partner and never notified any of the state agencies that she
was no longer a partner. She gave consent to first her father and then to Mr. Islam to conduct
business activities in her name. In fact, she listed the ABC license as an asset in her bankruptcy
petition. A business license and credit were extended based on her name, even if she lent her
name for the benefit of her family.
Partnership by Estoppel
Even if Athar’s conduct were not sufficient to constitute an actual partnership, there is
sufficient evidence for the Court to find that there was a partnership by estoppel. The acts and
omissions in question, as well as other evidence of the exercise of ownership authority, estop
Athar from denying that she was a partner with her father.
The UPA provides that where there is insufficient evidence of an actual partnership,
partnership liability may arise by estoppel. The UPA provides for liability for one who, by words
or by conduct, purports to be, or consents to being represented by another, as a partner in a
partnership. The purported partner is liable to the person to whom the representation is made if
that person, relying on the representation, enters into a transaction with the alleged partnership.
Cal. Corp. Code § 16308(a) (West 2008). The conduct of the ostensible partner must be
sufficient to induce a reasonable and prudent person to believe that a partnership exists and for
that person to enter into a transaction in reliance on that belief. Armato v. Baden, 71 Cal. App.
4th 885, 898, 84 Cal. Rptr. 2d 294 (Cal. Ct. App. 1999) citing Crabbe v. Mires, 112 Cal. App. 2d
456, 459, 246 P.2d 991 (Cal. Dist. Ct. App. 1952)).
To prove partnership by estoppel, BOE must show that: (1) the acts and conduct of Athar
were factually and legally sufficient to lead BOE to reasonably believe Athar was a copartner;
and (2) BOE relied on Athar’s representations in entering into transactions with Quick Mart. In
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re Lona, 393 B.R. 1, 16 (Bankr. N.D. Cal. 2008) citing J&J Builders Supply v. Caffin, 248 Cal.
App. 2d 292, 297, 56 Cal. Rptr. 365 (Cal. Ct. App. 1967); J.C. Wattenbarger & Sons v. Sanders,
216 Cal. App. 2d 495, 500-01, 30 Cal. Rptr. 910 (Cal. Dist. Ct. App. 1963); Hunter v. Croysdill,
169 Cal. App. 2d 307, 315, 337 P.2d 174.
Here, BOE reasonably relied on the representations contained in the application signed
by Athar in order to issue the sales permit. Overall, the evidence presented at trial showed a
pattern of conduct in which not one but two California governmental entities received
representations in writings signed by Athar that she was a partner in Quick Mart, as well as
substantial series of subsequent exercises of ownership on the part of Athar. BOE was entitled to
rely on the written statements attested to by Athar’s signature in the absence of any direct and
specific knowledge on its part that they were untrue. Thus, there was a partnership by estoppel
between Athar and Rehman.
Liability for signing in ignorance
No evidence was presented to support Athar’s argument that there was strong cultural
pressure for Athar to sign these documents. Nevertheless, subjective intent is not the issue. The
law is clear that, regardless of why Athar held herself out as a general partner and agreed to use
her credit to establish the business, she functions as a general partner. Athar is regrettably now
left to deal with the consequences. “The court's conclusions reflect the requirement under
California law that persons who reap the benefits of a partnership must also be subject to its
liabilities. Tsurukawa v. Nikon Precision, Inc. (In re Tsurukawa), 287 B.R. 515, 523 (B.A.P. 9th
Cir. 2002).
Athar did not know the legal consequences of the documents she signed but she did know
that her father was using her name for her credit and that others would rely on this
representation. She knew she was helping her father obtain permits for Quick Mart. Without the
business permit (Exhibit 1), it would not have been legal for Quick Mart to do business. She did
not consider herself a partner, but others relied on her representation. She participated in
establishing her father’s business, and unfortunately must now accept the consequences the law
imposes.
Determination of Debtor's Tax Liability by the Bankruptcy Court
Athar claimed in her closing argument that the Court should review the administrative
agency’s finding of tax liability where the finding was made at an uncontested hearing. See 11
U.S.C § 505(a)(2)(A). The Court declines to base its ruling on § 505 because neither the
Complaint nor the Joint Revised Pretrial Order invoked § 505. The Complaint is a request for a
declaratory judgment of dischargeability under “11 U.S.C § 507”. The pre-trial order then refers
solely to 11 U.S.C § 523(a)(1). Also, there was no evidence presented at trial that the tax was
illegal or that any other amount of tax was appropriate. There is no basis to find that the BOE
finding was improper.
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CONCLUSION
Thus, the California sales taxes assessed by the BOE are not excepted from discharge
under 11 U.S.C § 523(a)(1). Defendant should submit a judgment and order in accordance with
this ruling.
Date: February 27, 2014
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