UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

JOHN GLUDE,
Plaintiff-Appellee,

v.

MARTIN STERENBUCH,
Defendant-Appellant,                                                No. 97-1026

and

SABANA GRANDE PRAWN FARMS,
LIMITED,
Defendant.

Appeal from the United States District Court
for the District of Maryland, at Baltimore.
J. Frederick Motz, Chief District Judge.
(CA-95-2-JFM)

Argued: October 30, 1997

Decided: January 13, 1998

Before MURNAGHAN, HAMILTON, and LUTTIG,
Circuit Judges.

_________________________________________________________________

Affirmed by unpublished per curiam opinion.

_________________________________________________________________

COUNSEL

ARGUED: Matthew Anthony Rizzo, Washington, D.C., for Appel-
lant. James Joseph Nolan, Jr., PIERSON, PIERSON & NOLAN, Bal-
timore, Maryland, for Appellee.
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

_________________________________________________________________

OPINION

PER CURIAM:

Appellant, Martin Sterenbuch (Sterenbuch), entered into a business
venture with Appellee, John Glude (Glude). The company, known as
Aquaculture Enterprises, Inc. (AEI), was apparently not profitable,
and AEI failed for several years to pay its federal withholding taxes.
Following an Internal Revenue Service (IRS) investigation, Glude
was determined to be solely responsible for AEI's debt, and was
thereafter required under 26 U.S.C. § 6672 (1988) to pay the debt
himself. Glude filed suit against Sterenbuch in federal court, seeking
to recover Sterenbuch's share of the IRS tax debt on a theory of con-
tribution or breach of contract. Following a bench trial, the district
court found for Glude on both counts. On appeal, Sterenbuch chal-
lenges various aspects of the bench trial, including the verdict in favor
of Glude.

We find none of Sterenbuch's arguments convincing. We hold that
Glude and Sterenbuch had an enforceable contract to share in all cor-
porate debts, and that Sterenbuch breached the contract by failing to
share in the payment of the IRS tax debt. This holding makes it
unnecessary to determine if, in the alternative, Maryland state courts
would recognize a statutory right of contribution for federal tax debts
imposed under § 6672.

I.

Appellant, Sterenbuch, is a Washington, D.C. lawyer who in 1981
approached Appellee, Glude, a marine biologist, concerning the feasi-
bility of raising fresh water prawns in Puerto Rico. In 1983, after
lengthy discussions and the preparation of a feasibility study, the par-
ties incorporated AEI under the laws of Maryland to carry out the
prawn farming enterprise. Under the terms of the parties' agreement,
Sterenbuch was to be president and Glude vice-president of the corpo-

                     2
ration. In addition, Sterenbuch and Glude were to sit as directors of
AEI, making them "responsible for the control and management of
the affairs, property, and interest of the Corporation."

Also in 1983, Sterenbuch and Glude formed Sabana Grande Prawn
Farms (SGPF), of which they appointed themselves general partners.
They entered into a written partnership agreement which was updated
in September 1988. Under the terms of the partners' agreements,
SGPF was to own all of the stock of AEI; Glude was to operate as
a "technical manager;" and Sterenbuch was to provide "busi-
ness/financial and legal management services." Additionally, SGPF
was to "provide all necessary capital and operating funds," and AEI
was to "manage and account to the partnership for such funds."

SGPF and AEI eventually leased land in Puerto Rico and began the
fresh-water prawn farming operation. The firm's prospectus listed
Sterenbuch as "President of AEI and as general partner in the parent
company [SGPF]." All necessary funds raised through SGPF were
transferred to AEI as needed for development. The funds, which
totaled more than $5,000,000, were raised from a combination of
investments and loans. Although Glude was a general partner of
SGPF, he was not authorized to sign checks on behalf of the com-
pany.

In July 1990, Glude became concerned with the fact that employee
withholding taxes were regularly not being paid by AEI. He sent a
memorandum to Sterenbuch explaining that, as corporate officers, he
and Sterenbuch could be held responsible by the IRS for any unpaid
taxes, and proposing that the partners share equally in AEI's liabili-
ties. Sterenbuch wrote back, expressing his consent to Glude's pro-
posal and noting that, in his view, the agreement simply confirmed
"what was always [the parties'] implicit understanding."

A year and a half later, on February 23, 1992, the Internal Revenue
Service (IRS) sent Glude a letter proposing to assess a "100 Percent
Penalty" against him pursuant to the Internal Revenue Code, 26
U.S.C. § 6672, for AEI's unpaid withholding taxes for the years
1988-1991. The assessment totaled $137,744.36.

After receiving the IRS notice, Glude contacted Sterenbuch, who
referred Glude to attorney Julian Spirer, a friend of Sterenbuch's who

                    3
practiced law in the District of Columbia and who had previously per-
formed various legal tasks for AEI and SGPF. Glude took Steren-
buch's advice and supplied Spirer with background information
regarding the case. Spirer then authorized his legal assistant, Jeff, to
draft an appeal to the IRS on behalf of Glude. The appeal was unsuc-
cessful. Glude later learned that although he had advised Spirer of
Sterenbuch's role in the nonpayment of AEI's withholding taxes, the
appeal drafted by Jeff did not contain any reference or suggestion that
Sterenbuch might be equally responsible for the IRS debt.

After losing his appeal with the IRS, Glude drafted a letter to the
agency informing them that Sterenbuch and he were both general
partners of AEI and shared various management functions. Perhaps as
a result of that prodding, a short time later Sterenbuch himself
received a proposed "100 Percent Penalty" assessment (also in the
amount of $137,744.36) from the IRS. Sterenbuch responded by writ-
ing to the IRS and informing them, among other things, that he had
no management responsibilities over AEI; that he had never been
involved in the day-to-day operation of the company; and that he had
no control over AEI bank accounts. Thus, he contended, he was not
equally responsible with Glude for any of AEI's delinquent taxes. On
July 1, 1992, apparently in response to some of the information
Sterenbuch had supplied, the IRS determined that Sterenbuch was not
responsible for AEI's tax debt and removed its $137,744.36 assess-
ment against him.

Because the IRS continued to consider Glude fully responsible for
AEI's debt, in January 1995 Glude filed suit against Sterenbuch in the
United States District Court for the District of Maryland. Glude's
complaint sought relief for Sterenbuch's portion of the IRS debt,
based on either (1) a common law right of contribution, or (2) the par-
ties' agreement to share equally in all AEI liabilities.

Glude's case proceeded to trial before the Honorable J. Frederick
Motz. In response to a pretrial motion by Glude, the court issued an
order freezing the partnership accounts of SGPF pending the outcome
of the litigation. The court did not require Glude to post bond as
security for the order. The parties later reached a tentative settlement
agreement, and pursuant to Local Rule 111.11 they requested and, on
_________________________________________________________________
1 Local Rule 111.1 allows a court to dismiss a case in which the parties
have notified the court that a settlement has been reached. An order

                    4
January 20, 1995, the district court granted, an order dismissing
Glude's action and vacating the temporary restraining order. The
order was issued "without prejudice to the right of a party to move
for good cause within thirty days" to reopen the case. Glude's attor-
ney wrote the district court a letter within several days of that order
explaining that all of Glude's claims were not supposed to have been
dismissed pursuant to the settlement.

Although neither party filed to reopen the case within the thirty day
period, the parties' settlement was never consummated and, on March
7, 1995, Glude filed an amended complaint and his original case was
reopened. Sterenbuch moved to dismiss pursuant to Fed. R. Civ. P.
12(b)(6), on the grounds that Glude's case was time-barred and failed
to state a claim on which relief could be granted. The district court
denied those motions, as well as a similarly based motion by Steren-
buch for summary judgment at a later date.

The case ultimately proceeded to a bench trial on October 1-2,
1996. Among other evidence introduced at trial, Glude offered the
testimony of Dennis DeLong, who had worked as Assistant General
Manager of AEI in Puerto Rico from early 1984 until the middle of
1990. While serving in that position, DeLong maintained communica-
tions with Sterenbuch, speaking with him by telephone at least once
a week, and also communicating by way of mail and FAX. During the
course of those activities, DeLong became familiar with Sterenbuch's
role in the operation of AEI, which he described as providing finan-
cial and legal expertise, and managing the financial affairs of AEI.
DeLong also testified that whenever insufficient funds existed to
cover the payment of AEI's outstanding bills, he would contact
Sterenbuch in Washington, D.C., because Sterenbuch was able to dis-
burse funds, make bank or wire transfers, or send a check to cover the
payables.

In his Washington, D.C. office, Sterenbuch had available to him
AEI's computer printout of payables, including federal payroll taxes
_________________________________________________________________
issued pursuant to Rule 111.1 results in the dismissal of all claims, coun-
terclaims, cross-claims, and third-party claims, unless otherwise stated in
the order. See Local Rule 111.1.

                    5
owed to the government. DeLong testified that he and Sterenbuch
occasionally discussed the payment of federal payroll taxes and, on
"many occasions," when there was not enough money to go around,
Sterenbuch directed that DeLong pay other creditors instead of the
U.S. government.

At the conclusion of the evidence, the court found in favor of
Glude on his contribution and breach of contract claims, ordering
Sterenbuch to share equally in the payment of the IRS debt. Steren-
buch filed, and the court denied, a post-trial motion for reconsidera-
tion or a new trial.

II.

The district court entered a verdict in favor of Glude on his alterna-
tive breach of contract or contribution claims. On appeal, Sterenbuch
raises two issues with respect to this verdict. First, as to the breach
of contract claim, whether the district court erred in concluding that
the parties had an enforceable contract to share responsibility for
AEI's debts. Second, with regards to the contribution claim, whether
the district court erred in concluding that Maryland courts would rec-
ognize a state law right of contribution for federal tax debts arising
under § 6672. Because we answer the first question in the affirmative
-- and therefore hold that Sterenbuch is contractually bound to share
in the IRS tax debt -- we have no occasion to address the second.

Our analysis of Glude's contract claim requires, as an initial matter,
a determination as to which forum's law is to be applied. A federal
court exercising diversity jurisdiction, as in the present case, must
apply the substantive law of the state in which it sits. See Erie R.R.
v. Tompkins, 

, 78-79 (1938). This includes applying the
forum state's choice of law rules. See Klaxon Co. v. Stentor Elec.
Mfg., 

, 496 (1941).

Under Maryland law, questions regarding the validity, effect, and
interpretation of a contract are resolved according to the principle of
lex loci contractus, meaning the law of the state where the contract
was made. See Mallinckrodt v. Whittaker M.A. Bioproducts, Inc., 

, 1116 (Md. 1989) (citation omitted). The place of contract-
ing is defined by Maryland law as "the place where the last act neces-

                    6
sary to complete the contract was performed." 

Mutual Insurance Co. v. Van Buskirk, 

(Md.
1965)); see also Continental Cablevision of New England, Inc. v.
United Broadcasting Co., 

, 720 (4th Cir. 1989) (applying
Maryland choice of law rules). In the present case, the district court
apparently made no findings as to the locus of the contract. Neverthe-
less, because the parties have not contested the district court's appli-
cation of Maryland law, see Philip Bilancia v. General Motors Corp.,

, 623 (4th Cir. 1976) (per curiam), we assume for pur-
poses of appeal that such application was appropriate.

Glude's breach of contract claim is based on an exchange of letters
between the parties in July of 1990. At that time, Glude had become
concerned about the possibility of AEI's corporate officers being held
personally accountable by the IRS for any taxes the company had
failed to pay. He wrote Sterenbuch to express his concern and to pro-
pose an agreement in which the parties would share equally in all of
AEI's liabilities:

          [W]e as officers of AEI are personally responsible for pay-
          ment of IRS . . . taxes withheld from employees salary. As
          of the first of July, AEI owed IRS a total of $129,531 of
          which about $60,000 was withheld employees salary for
          Social Security (FICA). . . . [This is troublesome] since . . .
          [the IRS] can call on us for payment of the amounts due if
          AEI can not or does not pay these amounts.

          In view of this possibility, and in view of the basic tenet of
          our partnership to share equally in all aspects, I suggest the
          following actions.

          1. Develop a legally binding agreement that each of us
          will be responsible for 50% of any payments due because of
          our personal guarantees or our roles as officers of the Cor-
          poration.

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

           In response to your memorandum of July 22 and as per
          our telephone conversation, this is to confirm our agreement

                    7
          that to the extent that either of us is called upon to pay per-
          sonally any liabilities of [AEI], in cases where we are
          equally liable for such indebtedness . . . that we will share
          equally in all such payments.

           John, I think this confirms what was always our implicit
          understanding.

Under Maryland law, there is no question that Glude's letter consti-
tuted a valid offer, and that Sterenbuch accepted the offer during the
referenced telephone conversation or by writing his return letter. Nor
is there any doubt that the parties traded valuable consideration, as
each received from the other a promise to be personally responsible
for one-half of AEI's liabilities.

Sterenbuch raises several arguments in an effort to avoid his obli-
gations under the parties' agreement. First, he contends that the dis-
trict court erred in "second-guessing" the IRS's determination that he
was not responsible for AEI's tax debt. We disagree. The IRS's deter-
mination of Sterenbuch's responsibility to the government, although
relevant, is not controlling of our determination of Sterenbuch's obli-
gations to Glude. In any event, we agree with the district court's deci-
sion to deviate from the IRS's findings, since the court need not
"accept without question administrative pronouncements clearly at
variance with established facts." National Labor Rel. Bd. v. Morgan-
ton Full Fash. Hos. Co., 

, 915-16 (4th Cir. 1957); see
Bedford County Mem. Hosp. v. Health & Hum. Servs. , 

,
1022 (4th Cir. 1985) (citation omitted) ("Agency action is arbitrary
and capricious if the agency . . . reaches a decision that is so implausi-
ble that it cannot be ascribed to a difference in view.").

In reaching the conclusion that Sterenbuch was equally responsible
for AEI's tax liabilities, the district court was mindful of our opinion
in O'Connor v. United States, 

(4th Cir. 1992), where we
explained some of the various factors that militate toward labeling an
individual a responsible person for purposes of§ 6672. We held that
the inquiry must focus on "substance rather than form," and that the
key issue is the person's "authority over an enterprise's finances or
general decision making." 

of the circum-
stances must be such that the officer exercises and uses his authority

                     8
over financial affairs and general management . . . ." 

determined by reference to other factors, such as control over payroll
and decisions over which bills to pay or not to pay. See 

in mind, the district court concluded that Steren-
buch had wide-ranging management responsibilities at AEI, and that
as CEO of AEI's parent company, SGPF, he controlled the "spigot"
of funds on which AEI relied for its survival. The court also con-
cluded, based on the testimony of DeLong, that Sterenbuch had on
occasion directed that certain creditors be paid rather than the IRS.

In light of this evidence, the district court concluded, and we agree,
that the IRS's decision to remove Sterenbuch's status as a responsible
person was based on an incomplete factual record and was poisoned
by Sterenbuch's intentional misrepresentation of the scope of his
management role at AEI. We agree with the district court that Glude
and Sterenbuch were equally responsible for the creation of AEI's tax
debt and that sharing equally in the payment of that debt was squarely
within the terms of the parties' July 1990 agreement.

Sterenbuch next argues that the parties agreement is unenforceable
as a matter of public policy. This argument is based on the language
of § 6672, which allows for the imposition of liability for "willfully"
failing to pay withholding taxes.2 Sterenbuch reads this willfulness
language to require a showing of egregious conduct or evil intent on
the part of the delinquent taxpayer. Therefore, he argues, § 6672 was
intended to punish wrongdoers, and it violates public policy for a
court to enforce a contract in which Sterenbuch shares in Glude's
punishment.

We find no merit to this argument. To our knowledge, no court has
ever held that egregious conduct or evil intent is required for the
imposition of liability under § 6672. In fact, this Court has expressly
_________________________________________________________________
2 Internal Revenue Code, 26 U.S.C.§ 6672(a) provides that "[a]ny per-
son required to collect, truthfully account for, and pay over any tax
imposed by this title who willfully fails to collect such tax, or truthfully
account for and pay over such tax . . . shall, in addition to other penalties
provided by law, be liable to a penalty equal to the total amount of the
tax evaded . . . ."

                    9
held the opposite. In Turpin v. United States , 

(4th Cir.
1992), we held that a finding of willfulness under§ 6672 merely
requires the taxpayer to have knowingly or recklessly failed to pay the
required taxes:

          One must act "intentionally . . . and voluntarily." . . . The
          failure to pay . . . taxes cannot be willful unless there is
          either "knowledge of nonpayment or reckless disregard of
          whether the payments were being made." . . . The"inten-
          tional preference of other creditors" over the United States
          is "sufficient to establish the element of willfulness" . . . .

omitted); see also 

n.*;
United States v. Pomponio, 

, 298 n.5 (4th Cir. 1980). We
therefore reject Sterenbuch's contention that § 6672's requirement of
willful conduct necessarily demonstrates a punitive purpose.

Sterenbuch also maintains that the statute is punitive because, in
addition to requiring payment of the tax bill, the statute imposes a fine
on the delinquent taxpayer amounting to 100% of the total tax bill.
This is simply incorrect. Although nothing in the language of § 6672
would prevent the IRS from using the statute in such a manner, as a
matter of official policy the IRS does not utilize§ 6672 to collect pay-
ments over and above the amount of taxes owed. See 

n.6 ("[I]t is IRS policy that the amount of the tax will be
collected only once. After the tax liability is satisfied, no [further] col-
lection action is taken . . . .") (quoting United States v. Sotelo, 

, 279-80 n.12 (1978) (quoting statement from Comptroller
General)); see also Gens v. United States, 

, 1339 (Ct.
Cl. 1980) (citations omitted) ("The Government can enforce [§ 6672]
assessments until it has collected successfully an amount equal to the
payroll tax liability which has given rise to the penalty assessments.");
I.R. Manual, Policy Statement P-5-60, MT 1218-56 (Feb. 25, 1976)
("The 100-percent penalty . . . will be used only as a collection device
. . . [where] such taxes cannot be collected from the corporation
itself.").

In light of all this, it is clear that, contrary to Sterenbuch's conten-
tions, § 6672 is used not as a means of punishment, but merely as a
tax collection device to ensure the payment of delinquent taxes where,

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

n.6 ("IRS uses the 100-percent penalty only when all
other means of securing the delinquent taxes have been exhausted.")
(quoting 

n.12)); 

.

The record of the instant case is consistent with IRS policy. The
assessment sheets in which the IRS kept track of AEI's growing tax
liability demonstrate in no uncertain terms that the penalty of
$137,744.36 assessed against Glude represented nothing more than
the total amount of taxes AEI had failed to pay for the years in ques-
tion. Because Glude was not required to pay an amount over and
above AEI's total tax bill, there is no merit to Sterenbuch's suggestion
that Glude was subjected to a punitive measure.

We are confident that the contract in question is enforceable under
Maryland law. Maryland courts have long recognized"the general
rule that there is contribution among parties to a contract . . . ." See
Baker v. Miles & Stockbridge, 

, 379 (Md. 1993). This
includes, of course, situations like the case sub judice, where "the par-
ties are bound [to a joint obligation] by a statute [or] by an instrument
. . . ." 

in Maryland, a right of contri-
bution arises among parties to a contract where such a right was
agreed to by the parties in an instrument, or where a common obliga-
tion is imposed by statute.

Although there may be every reason to believe that Maryland
courts would recognize a statutorily imposed right of contribution,
under state law, for federal tax obligations arising under § 6672, see
Lyon v. Campbell, 

(Md. 1991) (recognizing a right of
contribution for state-imposed corporate tax debts arising from a state
tax statute analogous to § 6672), we find it unnecessary to reach that
conclusion. Instead, we hold that, in the case at bar, a right of contri-
bution exists under Maryland law, not by virtue of a statutorily
imposed obligation, but as a result of a signed instrument in which the
parties agreed to share equally in certain liabilities. Because Maryland
courts approve of such contracts, and because we conclude that obli-
gations imposed pursuant to § 6672 are not punitive, we have no diffi-

                     11
culty concluding that the parties' contract is enforceable as a matter
of public policy.3

III.

Sterenbuch's appeal raises four additional charges of error, only
two of which merit discussion. For the reasons stated below, we
affirm the district court on both matters.

A. Reinstatement of Time-Barred Action

Sterenbuch argues that Glude's entire cause of action was time-
barred and should not have been heard by the district court. That con-
tention is based on the fact that Glude, in filing to reopen his suit in
March of 1995, failed to do so within the thirty day period specified
in the district court's Rule 111.1 dismissal order. Sterenbuch raised
this same argument before the district court pursuant to his motion to
dismiss under Rule 12(b)(6), and the district court rejected it, stating
that "Plaintiff's counsel properly informed the court, five days after
the Rule 111.1 order, that the entire action should not have been dis-
missed . . . . That notice was entirely sufficient."

Although we are not necessarily persuaded by the district court's
reasoning, a prior decision of this Court provides that Glude's claim
was not time-barred. In Choice Hotels Int'l, Inc. v. Goodwin &
Boone, 

(4th Cir. 1993), we held that a dismissal pursuant
to Local Rule 111.1 and its FRCP counterpart, Rule 41(a)(2), is pre-
sumed to be without prejudice unless the court's order is "explicit and
clear" in warning the parties that a failure to meet conditions stated
in the order will result in dismissal with prejudice. See 

that rule, we held that a Rule 111.1 dismissal subject to the
right of a party to refile "without prejudice . .. within thirty days" was
not sufficient to put a party on notice that a dismissal with prejudice
would result from a failure to refile within the designated time period.
See 

the district court's order in Choice Hotels
contained language identical to that used by the court in the present
case, we conclude that any dismissal resulting from Glude's failure
_________________________________________________________________
3 Indeed, we believe public policy is served by requiring Sterenbuch to
share equally in the payment of a debt he helped to create.

                     12
to meet the 30-day refiling deadline was a dismissal without prejudice
only.

B. Issuance of TRO Without Bond

After filing his complaint at the outset of this litigation, Glude
made an application on December 15, 1994, pursuant to Fed. R. Civ.
P. 65, for a temporary restraining order (TRO) to freeze all partner-
ship bank accounts at AEI's parent corporation, SGPF. The district
court granted the TRO on January 9, 1995, without requiring Glude
to post bond as required by Rule 65(c). Sterenbuch argues that the
court's failure to require the posting of bond is reversible error.

We disagree. Although there is no question that the district court's
failure to require the posting of bond was in error, see Md. Dept.
Human Resources v. U.S. Dep't Agric., 

, 1483 & n.21
(4th Cir. 1992), Sterenbuch's claim on this issue was mooted by the
district court's order of January 19, 1995, which dismissed Glude's
cause of action pursuant to a tentative settlement agreement and
vacated the TRO. Although Glude's case was eventually reopened,
the record reveals that the TRO was never reissued, and Sterenbuch's
appeal of this issue is moot.

IV.

In summary, we reject all of Sterenbuch's challenges to the district
court's judgment, and affirm the verdict in favor of Glude on his
breach of contract claim. We take no position as to whether Maryland
state courts would recognize a statutory right of contribution for fed-
eral tax obligations imposed pursuant to § 6672.

AFFIRMED

                    13