United States v. First National Bank of Circle

Beginning in the spring of 1970, Fort Belknap Builders, Inc. (Builders) borrowed money from the First National Bank of Circle (Bank) (defendant) and one of the Bank’s affiliates in order to construct houses. From the fourth quarter of 1970 through the end of 1971, Builders failed to pay federal withholding and Federal Insurance Contribution Act (FICA) taxes. Builders did pay its employees’ wages, however. During the latter part of 1971, Builders’ account with the Bank was significantly overdrawn. In 1974, the United States (plaintiff) sued the Bank pursuant to Section 3505(b) of the Internal Revenue Code, which imposed liability upon lenders who supplied funds to employers who failed to pay federal withholding taxes where the loans were specifically made for the payment of employee wages and where the lender knew that the employer did not intend or was not able to pay the required taxes. The Bank responded to the complaint with a general denial; it did not specifically deny that it had supplied funds to Builders. In 1978, the United States and the Bank agreed to a pretrial order that set forth a statement of agreed facts and a summary of each party’s contentions. The agreed facts included a statement that between March 16, 1970 and December 31, 1971, the Bank made numerous loans and advances to Builders. The pretrial order set forth five contentions by the Bank: that the Bank lacked knowledge; that its loans to Builders were not specifically made to pay wages; that Builders was able to pay its taxes; that Builders actually paid its taxes; and that the suit was barred by the statute of limitations and laches. At the start of trial, the Bank moved for summary judgment on the ground that it had not supplied funds to Builders. The court granted summary judgment, finding that the Bank was not a supplier but had merely arranged, as an agent, for participating banks to furnish the loans. The United States appealed.