Mortenson v. National Union Fire Insurance Company

Lee Mortenson (plaintiff) was the president of Opelika Manufacturing Company (Opelika). In November 1994, Mortenson learned that Opelika previously failed to pay more than $100,000 in federal payroll taxes that it owed to the Internal Revenue Service (IRS). Mortenson instructed his financial officers that he did not want Opelika to fail to turn over additional payroll taxes to the IRS, but Mortenson did not discipline the responsible employees or institute corrective measures. To the contrary, Mortenson participated in Opelika’s efforts to delay paying certain creditors. In late 1994 and early 1995, Opelika again failed to pay its payroll taxes to the IRS. In July, pursuant to Internal Revenue Code (code) § 6672(a), which makes one who is responsible for collecting, accounting for, and paying over payroll taxes personally liable for willfully failing to do so, the IRS assessed Mortenson 100 percent of Opelika’s unpaid payroll taxes. Mortenson eventually agreed to pay $900,000 to the IRS. Mortenson then sought reimbursement from the National Union Fire Insurance Company (National Union) (defendant) under an insurance policy that covered Mortenson for losses due to wrongful acts. National Union denied Mortenson’s claim, citing the policy’s exclusion for losses due to “fines or penalties imposed by law” or other matters deemed uninsurable as a matter of public policy. Mortenson sued National Union, arguing that the exclusion was inapplicable because § 6671(a) was not a real penalty due to the IRS’s policy of limiting its § 6672(a) collections to the amount of unpaid payroll taxes. Mortenson further contended that a penalty must punish deliberate wrongdoing, whereas § 6672(a) applied to willful conduct, which purportedly was much less culpable than deliberate wrongdoing.