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March 26, 1992

BRIAN A. COOKE, Plaintiff,

The opinion of the court was delivered by: ROBERT PECKHAM


 This is a civil tax refund suit filed by Plaintiff Brian Cooke to contest assessments made against him by the Internal Revenue Service ("IRS"). The assessments were made pursuant to 26 U.S.C. § 6672 on the theory that Cooke was a "responsible person" of South Pacific Island Airways ("SPIA") for the last two quarters of 1986 and the first quarter of 1987 and is liable for certain unpaid payroll taxes withheld from SPIA employees and excise taxes collected from SPIA passengers during that period.

 Plaintiff seeks a determination that he is not liable for the assessment and a refund of amounts paid on the assessment and interest thereon. The United States filed its answer and crossclaim seeking to reduce the assessment to judgment in the amount of the balance due on the assessment, plus statutory interest.

 Trial was held before this court on October 23 and 24, 1991.


 1. SPIA was a small passenger airline which operated routes in the South Pacific. It was in Chapter 11 bankruptcy at all times relevant to this action.

 2. George Wray was the sole shareholder of SPIA and ran the SPIA operation as a "one man show" with himself at the center of control.

 3. Brian Cooke worked in airline management throughout his career but resigned from full-time management following a cerebral hemorrhage in 1984. Following his resignation he worked in various part-time consultant and executive airline positions.

 4. Cooke joined SPIA in June, 1986 on a part-time basis to assist the faltering airline with interline agreements and to encourage lenders and investors to put additional capital into to SPIA.

 5. In July, 1986, as a result of creditor dissatisfaction with Wray's management of the airline, John Chanin, counsel for the SPIA creditors' committee, moved to have a trustee appointed by the bankruptcy court to replace Wray in controlling the company. The IRS also moved at this time to convert SPIA's bankruptcy to a Chapter 7 liquidation proceeding.

 6. On July 30, 1986, at a bankruptcy hearing in Hawaii, Chanin suggested that Brian Cooke be appointed CEO of SPIA in lieu of the appointment of a trustee. Cooke was not present and had no knowledge that his name would be raised in connection with this issue.

 7. Cooke was informed of his nomination by Wray who explained that if Cooke accepted the position he would have to prepare a report on SPIA and review past expenditures of the company while Wray would continue to run the airline. Cooke told Wray he was not physically able to handle full-time employment or perform all the duties generally associated with the position of CEO. Wray assured Cooke he did not expect him to run SPIA.

 8. Chanin and Enver Painter, SPIA general counsel, later called Cooke to discuss his appointment as CEO. It is unclear to what extent his duties were discussed. Chanin did express concern over Wray's cavalier management style. Cooke responded that he could not work full-time as CEO.

 9. Cooke accepted the position, subject to bankruptcy court approval, in a letter to Chanin and Painter dated July 31, 1986. Cooke requested increased compensation in the letter.

 10. A stipulation for the appointment of Cooke as CEO, setting forth his duties was prepared and approved by the bankruptcy court and filed on August 11, 1986 without Brian Cooke having seen or approved it.

 11. The stipulation contained the following description of Cooke's duties:

 Cooke, along with those duties normally attributable to a CEO of an airline company, shall be in control of, and responsible for, the operation of the Debtor, including but not limited to, financial control of, and business judgments for, the Debtor.

 Upon entry of this Stipulation and Order, Cooke either individually or through his designee shall supervise and become a signatory on all financial accounts kept by the Debtor. All individuals presently a signatory on the financial accounts kept by the Debtor shall cease to be a signatory thereon during the period that this Stipulation and Order is in effect unless specifically authorized to be a signatory by Cooke.

 12. Cooke first saw the stipulation a few days after it was filed and found that it included duties that were not discussed with him by Wray prior to his acceptance of the position.

 13. When Cooke expressed concern to Painter and Wray regarding the broad duties set forth in the stipulation, Wray explained that the order merely "authorized" Cooke to perform those duties and assured Cooke that the arrangement would continue to be that he was working for Wray. Similarly, Painter told Cooke the stipulation gave him the authorization to do the acts specified and did not require that he perform those duties.

 14. A transcript of the July, 1986 meeting, which Cooke eventually read, indicates that the creditors intended that Cooke would take over the running of the airline from Wray. The discussions at the hearing indicate that it was expected that Wray would have to go to Cooke for approval before taking actions connected with the management of the airline. The record indicates, however, that this transfer of control never actually occurred.

 15. Cooke's appointment as CEO was not considered by SPIA employees to alter Wray's control of the business. Numerous employees testified in depositions that despite Cooke's appointment as CEO, George Wray continued to run the company, making all management and financial decisions.

 16. There is no evidence that any employees went to Cooke after his appointment as CEO for approval of the payment of bills or disbursements.

 17. Elizabeth Luana Sala, the SPIA employee responsible for ensuring SPIA bills were paid, never went to Cooke for approval. According to Sala, "no one could touch a cent in that bank account without George's O.K.". (Sala 7). She further testified, "the only person you could ever see to get anything paid was through George." Id.

 18. Similarly, in describing the procedure for the payment of disbursements at SPIA after Cooke was CEO, Evelyn Adams, an employee in the interline revenue department, claimed that all checks were submitted to George Wray "and George would say what needed to be paid". (Adams 4-5). According to Adams, Cooke was never involved in this process. Adams further testified that Cooke was only in and out ...

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