Fidelity Bank, N.A. v. United States

CDI Homes, Inc. (CDI) was a construction company in an arrangement with a bank, Fidelity Bank, N.A. (Fidelity) (plaintiff). CDI built prefabricated homes for an entity affiliated with the Department of Housing and Urban Development. In order to finance its building, CDI had a $1 million revolving credit agreement with Fidelity. When CDI encountered challenges , Fidelity would allow it to overdraw its account, but only when it was about to complete a sale of homes. CDI would contact Fidelity, and a bank officer would review any checks. If they looked normal, the officer would initial them and allow them to be honored, even in excess of CDI’s credit line. Checks that were to be used as payroll were specifically and clearly marked “PAYROLL” on the faces of the checks. CDI failed to pay income and Federal Insurance Contribution Act (FICA) taxes withheld from wages to employees for the second quarter of 1973, and Fidelity therefore dishonored checks for taxes withheld for the months in question in the final days before CDI was shut down in June 1973. This may have triggered liability for Fidelity, as the Internal Revenue Code (IRC) allows for liability for one who supplies monies directly for the purpose of paying wages with actual knowledge that the primary party did not intend or would not be able to pay the taxes in question. Additionally, the IRC also allows for imposing unpaid taxes when a responsible person willfully fails to pay the taxes in question. When the Internal Revenue Service commissioner assessed a penalty to Fidelity of the entire withholding taxes owed by CDI ($36,150.42), Fidelity paid $381.23 of the amount assessed and sued the government (defendant) for a refund. The government filed a counterclaim for the balance due. At trial, the jury found for Fidelity and against the government. The government appealed.