4 ABR 515 UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA

In re NEIL G. BERGT; ALASKA IN- TERNATIONAL PROPERTIES, INC.; VIEWPOINT VENTURES PARTNERSHIP; ALASKA INTERNATIONAL INDUSTRIES; ALASKA DIVERSIFIED PROPERTIES, Debtor(s)	Case Nos. A95-00334-HAR; A95-00820-HAR; A96-00344-HAR; A96- 00345-HAR; and A96-00346-HAR Jointly Administered Debtors In Chapter 11 ADV PROC NO A95-00334-004-HAR (BANCAP No. 96-3096) FINDINGS OF FACT AND CONCLUSIONS OF LAW ["Responsible Person" Is- sue, 26 USC § 6672]
NEIL G. BERGT, Plaintiff(s) v. UNITED STATES OF AMERICA, IRS, Defendant(s)

     A trial on the issue of whether Neil Bergt was a "responsible person" under 26 USC § 6672 for unpaid air transportation excise taxes of MarkAir, Inc., during the first and second quarters of 1992, was held on April 9 and 10, 1997. Other issues remain to be tried, such as the amount of the tax claim and whether it should be pro rated due to the filing of the bankruptcy. Pursuant to FRBP 7052, incorporating FRCivP 52(a), the court enters its findings of fact (found in the paragraphs numbered "1") and conclusions of law (found in the paragraphs numbered "2") based on the evidence and argument presented.

1. FINDINGS OF FACT

     1.1. Background of Neil Bergt, AII, and MarkAir

     1.1.1 Neil Bergt was employed by Interior Airways as a pilot in 1957. Interior Airways was in the business of transporting cargo. From 1957 through 1965, Neil Bergt alternated piloting for Interior Airways with piloting for Alaska Airlines. From 1965 until 1970, Neil Bergt was chief pilot and director of flight operations for Interior Airways.

     1.1.2. In 1969, Interior Airways filed a petition under Chapter XI of the Bankruptcy Act. In May of 1971, Interior Airways emerged from bankruptcy and Neil Bergt became a majority shareholder, its President

   4 ABR 516 and Chief Executive Officer.

     1.1.3. In 1971 or 1972, Interior Airways changed its name to Alaska International Air, and in 1984 to MarkAir. At some point, Neil Bergt incorporated a holding company named Alaska International Industries (AII), and transferred his shares in the airline to AII. In 1978, AII conducted a leveraged buy-out of the airline and acquired 100% of its stock. In the mid-1980's, MarkAir instituted an employee stock option program, and some stock was issued pursuant to that program. By the beginning of 1992, AII owned approximately 97% of the MarkAir stock, the rest having been distributed through the employee stock ownership program. Neil Bergt was the sole shareholder of AII.

     1.1.4. In 1991 and 1992, until, at least the filing of MarkAir's chapter 11 proceeding on June 8, 1992, Steve Hartung was President of AII, and a Vice President of MarkAir. Steve Hartung handled Neil Bergt's personal finances and the overall financial needs of all of AII's holdings, which included dealing with banks and borrowing money from creditors. AII also owned interests in a real estate business, Alaska Diversified Properties, Inc., and an energy business, Arctic Alaska Energy Group, Inc. Prior to MarkAir's Chapter 11 filing on June 8, 1992, Hartung acted as an in-house investment banker for AII and its related corporations, including MarkAir.

     1.1.5. In 1984, MarkAir entered the market for passenger air traffic. Ralph Brumbaugh became MarkAir's President.

     1.1.6. Ralph Brumbaugh retired in the spring of 1991. From the spring of 1991 through most of the rest of the year, MarkAir operated without a formal president. Near the end of 1991, Neil Bergt named Mike Cerkovnik as the new President of MarkAir.

     1.1.7. Before 1992, a result of his positions with Western Airlines and MarkAir and its predecessors, Neil Bergt was aware of the federal transportation excise tax (26 USC § 4261, et seq), but did not become aware of the 100% penalty tax under 26 USC § 6672 until after MarkAir's bankruptcy was filed in June, 1992.

     1.2. MarkAir's Deteriorating Relations with Alaska Airlines; MarkAir's New Business Plan in 1991

     1.2.1. Prior to the spring of 1991, MarkAir had "code sharing" and frequent flyer agreements with Alaska Airlines which were advantageous to

   4 ABR 517 MarkAir's business. Neil Bergt and/or MarkAir officials had negotiated the agreements with Bruce Kennedy, the President of Alaska Airlines. The code sharing agreement allowed MarkAir to carry Alaska Airlines' passengers arriving in Anchorage from outside of Alaska, to points within Alaska. The frequent flyer agreement allowed MarkAir to participate in Alaska Airlines' frequent flyer program, which was a positive marketing factor for MarkAir.

     1.2.2. In April 1991, Bruce Kennedy, the Alaska Airlines President, retired. Under its new leadership, Alaska Airlines' formerly cooperative relationship with MarkAir became more contentious and more competitive. The code sharing and frequent flyer arrangement were terminated in the fall of 1991. Neil Bergt and officers of MarkAir solicited other major air carriers to become code sharing partners without success. In order to feed its intra-Alaska routes, Neil Bergt made the decision that MarkAir would carry passengers from Seattle to Anchorage.

     1.2.3. Contemplating the need for a major change in MarkAir's business plan due to the loss of its code sharing partner and inability to find a substitute, in 1991, Neil Bergt devised a yield management system for MarkAir. The purpose of the yield management system was to understand and more tightly manage costs and revenues in order to effectively compete with Alaska Airlines and other competitors, and still be profitable. He obtained the services of an airline consultant, Joe Lorenzo, who was himself in the process of developing a startup airline, Reno Air.

     1.2.4. In order to carry passengers between Seattle and Anchorage, MarkAir needed more sophisticated jet airplanes. In the latter part of 1991, and first few months of 1992, Mike Cerkovnik (with the help of Steve Hartung) spent much of his time negotiating the acquisition of aircraft for MarkAir. Neil Bergt also used his personal reputation to encourage airplane leasing companies all over the world to lease airplanes to MarkAir, and to encourage MarkAir's primary lender, Seattle First National Bank, to enlarge MarkAir's line of credit.

     1.2.5. Neil Bergt, from at least sometime in 1991 through the bankruptcy filing on June 8, 1992, was the individual in substantial control of MarkAir, who had the right to determine who would be paid, and how the company would be operated. Though he had semi-retired from

4 ABR 518 MarkAir's business in the 1980s, in 1991, the problems with Alaska Airlines and the new business plan show that he resumed active involvement in the conduct of business affairs. While he did not sign bank checks himself, and relied on operating personnel to conduct the day-to-day operations, Neil Bergt was the party directing the strategy of MarkAir.

1.3. Neil Bergt's California Divorce and Child Custody Proceedings

1.3.1. In the fall of 1991, Neil Bergt spent much of his time preparing for Neil Bergt's divorce trial in the spring of 1992, in Orange County, California. Steve Hartung was also extensively involved in the trial preparation and presentation. Neil Bergt also spent significant time earlier in 1992, in San Diego, in proceedings conducted by a court-appointed psychologist regarding his child custody dispute. A major issue addressed in the Orange County trial concerned the value of MarkAir, and tracing its assets to community or separate property. From late March through mid-May of 1992, Neil Bergt and Steve Hartung spent most of their time in Orange County, California, preparing for or participating in the divorce trial.

1.3.2. While in Orange County, Neil Bergt was in touch with MarkAir's day-to-day operations. Neil Bergt had arranged to have certain information faxed to him daily. The information that Neil Bergt had arranged to be faxed to him was the daily status reports of bookings for various time periods (such as the next 30 days, 30-60 days, 60-90 days) for the most heavily traveled routes broken down by route and fare class. The daily status reports were faxed to Neil Bergt at his hotel in Orange County on a daily or near-daily basis. Steve Hartung also received monthly financial reports (balance sheets, income statements, and cash flow reports) from the MarkAir Accounting Department headed by Judy Bandel. Hartung also received weekly cash flow reports (see, e.g., Exhibit 33, as an example of the type of report sent to Steve Hartung). Some of the cash flow reports were daily reports with weekly summaries. See, generally, Exhibit C1-25.

1.3.3. While Neil Bergt was in Orange County, California, for his divorce trial, he received a call from his son Mike Bergt who was an officer of MarkAir Express, a subsidiary of MarkAir, asking Neil Bergt to remove Mike Cerkovnik for "not doing anything."

4 ABR 519

1.3.4. Despite his delegation of day-to-day operations to others, it is unlikely that Neil Bergt was not aware of the financial condition of MarkAir, either directly or through his selected lieutenant, Steve Hartung.

1.4. Neil Bergt's Involvement and Knowledge of MarkAir's Affairs in First Half of 1992

1.4.1. During the first half of 1992, including the time he was in Orange County, Neil Bergt signed several resolutions of the Board of Directors of MarkAir, including resolutions bearing the following dates and pertaining to the following subjects:

-	January 10, 1992, concerning leasing a 737-25A aircraft;
-	January 15, 1993, concerning leasing two DHC-8 Series 300 Model DS 8300A aircraft;
-	February 17, 1992, concerning increasing MarkAir's revolving credit facility with Seattle First National Bank to $5 million, guaranteed by Neil Bergt;
-	March 2, 1992, concerning the purchase of a 737-400;
-	March 10, 1992, concerning leasing a CFM International airplane engine;
-	March 17, 1992, concerning an amendment to the MarkAir Articles of Incorporation;
-	March 20, 1992, concerning the purchase of another 737-400;
-	April 2, 1992, concerning increasing the Seattle First National Bank revolving credit facility to $7.7 million;
-	May 1, 1992, concerning amending the Am-Mark Associates partnership agreement and several of Am-Mark's agreements with First Security Bank of Utah.

1.4.2. During March, 1992, Neil Bergt happened upon a meeting including Judy Bandel (controller of MarkAir), Mike Cerkovnik (President), and other MarkAir officials at MarkAir's offices in Anchorage. This was before the start of Neil Bergt's Orange County trial which began in the last week of March, 1992. At the meeting, Judy Bandel told Bergt that there was not enough money to both support the expansion under way pursuant to the business plan and pay current operating expenses, including transportation excise taxes. She told him the expansion should

4 ABR 520 slow down or MarkAir would run out of cash. As a result of the meeting, Neil Bergt called a meeting of most of MarkAir's department heads for the next day in which he put spending restrictions in effect. He put a $5,000 limit on spending for all out-of-the-ordinary expenses unless approved by Mike Cerkovnik or Gene Zerkel, Vice President of Maintenance and Flight Operations at MarkAir. This evidence refutes Neil Bergt's testimony in several respects: (a) that he was unaware of the prepetition excise tax deficiency until September, 1994, when he received a letter from the IRS about possible "responsible person" liability; and, (b) that he had a completely hands off approach to the operation of MarkAir until sometime in late May or early June, 1992, just before the chapter 11 was filed. Ms. Bandel's testimony about the meeting was more credible than Mr. Bergt's, who suggested that such a meeting probably took place in 1991.

1.4.3. Neil Bergt relied on Steve Hartung to keep track of the company. Hartung has an accounting and business background, and for a long time had been associated with AII, MarkAir, and Bergt. He helped Bergt prepare for and present his case in Orange County. Hartung kept tabs on the financial position of MarkAir in 1992, and received monthly financial statements (containing historical information) and weekly cash flow reports (consisting of both historical and projected information). Both types of information would give a sophisticated reader, like Hartung, knowledge that many creditors, including the United States for transportation excise taxes, were not being paid from the very beginning of 1992. In the spring of 1992, some efforts were made by Hartung through investment bankers to promote an initial public offering to sell stock to the public to raise working capital. It is not credible that Steve Hartung would seek to persuade investment bankers, commercial lenders, and jet aircraft lessors to respectively engage in a public offering of MarkAir stock, loan funds or lease equipment to MarkAir without being familiar with the current status of MarkAir's operations and performance of its September, 1991, business plan. The court finds, by inference, that Hartung kept Bergt apprized of the precarious cash flow position of MarkAir from the beginning of 1992.

1.4.4. Neil Bergt testified that the only information he received until just before the chapter 11 filing on June 8, 1992, was 4 ABR 521 rudimentary daily status reports showing the loads on MarkAir flights. He testified that these reports were not sufficiently informative to give him a picture of MarkAir's cash flow position. Yet, he acknowledged that, although the reports showed MarkAir was performing adequately according to the business plan, he knew the revenue was less than had been projected and the company was falling seriously behind many of its payables. This testimony indicates he was clearly aware of the financial condition of MarkAir in the first half of 1992. Bergt also knew that the business of MarkAir was seasonal, and that it tended to lose money in the period after the summer season until the next spring. The new, untried, and capital intensive business plan to fly the Anchorage-Seattle corridor was being instituted, out of necessity, at the worst season of the year. The court finds, by inference, that Bergt had to know that many of MarkAir's creditors were not being paid.

1.4.5. For three years during the 1980s, Neil Bergt had been Chief Operating Officer and executive with Western Airlines, which ultimately became part of Delta Air Lines. Both his Western experience and his extensive experience with MarkAir and its predecessors, make it highly improbable that Bergt would allow himself to become so aloof from the operating condition of MarkAir in 1992, that he was unaware that significant arrearage was being accrued from the beginning of 1992. While this might have been more believable during the profitable days of the 1980s, it is highly improbable that Bergt allowed himself to be so divorced from the operation of MarkAir at a time when: (a) MarkAir had terminated it code sharing arrangement with Alaska Airlines in mid-1991; (b) undertaken a new and different business plan which was finalized in September 1991, which included flying more expensive jets in the Seattle-Anchorage corridor to obtain feed for its intra-Alaska routes; (c) was taking Alaska Airlines and its new code sharing and frequent flyer partners on, head-to-head on various routes; (d) had just closed a major borrowing from AIDEA structured as a sale-leaseback of MarkAir's Fairbanks hangar; (e) when the airline industry in general was in a state of disarray and flux stemming from deregulation; and, (f) during the slow season for MarkAir even in normal times.

1.4.6. Steve Hartung advised the attorneys involved in the Orange County divorce proceeding in May, 1992, that they had better end 4 ABR 522 the litigation and allow Neil Bergt and him to get back to Alaska "or there would be no MarkAir to argue about" or words to that effect. This infers a knowledge of MarkAir's precarious financial condition. See, ¶¶ 1.3.2-1.3.4.

1.4.7. MarkAir's business was seasonal. Revenue came in primarily during the spring and summer. Fixed expenses, such as airplane lease costs and debt service, were more constant. Consequently, MarkAir was usually cash-rich in the late summer, and cash-poor in the winter. Typically, the cash situation was most precarious in the early spring before the summer revenues started to come into MarkAir's bank accounts. The cash position of MarkAir was much worse in 1992. Mike Cerkovnik testified that he kept Bergt apprized of the operations; Bergt denies this. I find, for the reasons stated in the previous findings, 1.4.1-1.4.6, that Cerkovnik's testimony is more credible on this point.

1.4.8. During the first six months of 1992, Neil Bergt was aware of MarkAir's seasonal cycle such that it is short of cash in the spring, and was also aware that MarkAir was incurring greater expenses than in previous years because of the expansion.

1.4.9. Neil Bergt knew during this period that MarkAir did not have sufficient cash flow to pay the creditors that were making demands, and that ticket sales were not meeting the goals. Neil Bergt was concerned with the fact that if the leasing companies were not paid, those creditors could take back the airplanes.

1.4.10. Neil Bergt's relationship to MarkAir cannot be analogized to that of the taxpayer in Slodov v US, 436 US 238, 98 SCt 1778 (1978). Neil Bergt was not an outsider who took over a business after all the trust fund money had been depleted for non-tax purposes. Rather, he is more analogous to the taxpayer in Purcell (see, ¶ 2.4).

1.4.11. While the divorce and custody proceedings in California were a substantial distraction to Neil Bergt in the first half of 1992, he was not so oblivious to the operations of MarkAir that he was not aware of the severe cash flow deficiency created by MarkAir: (a) having to implement a new, untested business plan during the worst seasonal period of MarkAir's normal year; (b) the need to obtain and pay for substantial new jet equipment during these fallow months; and, (c) the need to train pilots on the new equipment and for the new routes. 4 ABR 523 All this should have lead Bergt to realize some creditors were being unpaid. He either knew the air transportation excise taxes were in arrears, or was reckless in failing to investigate the financial position of MarkAir more closely. The new jet equipment was obtained in part by deferrals or reduced payments, but the cash flow statements of MarkAir, Exhibits C1-35, showed substantial payments were made to aircraft lessors during early 1992.

1.5. Some of MarkAir's Air Transportation Excise Taxes Were Unpaid During the First Half of 1992; 100% Penalty

1.5.1. Pursuant to 26 USC § 4261(a) and related Internal Revenue Code section and regulations, some of the excise tax imposed upon MarkAir was unpaid. The exact amount was not established during the first phase of the adversary proceeding trial, but tentatively appears to be an amount between $1.1 - 3.0 million.

1.5.2. During the period from January 1, 1992, through June 8, 1992, MarkAir paid tens of millions of dollars to creditors other than the United States on the delinquent air transportation excise taxes accrued during the same period.

1.5.3. From sometime in mid-March, 1992, Neil Bergt knew that there were significant unpaid air transportation excise taxes during the first quarter of 1992, and yet permitted creditors other than the United States to be paid, not only for those air transportation excise taxes which had accrued through mid-March, 1992, but those later accruing through June 8, 1992.

2. CONCLUSIONS OF LAW

2.1. The bankruptcy court has subject matter jurisdiction. 28 USC § 1334(b). This is a core proceeding in which the court may enter a final judgment. 28 USC § 157(b)(2)(I), 11 USC § 505(a)(1). The decision in this first phase of the adversary proceeding trial is not a final judgment.

2.2. MarkAir, Inc. was required to and did collect an excise tax from its customers paying for transportation by air. 26 USC § 4621, et seq. The taxes collected were "trust fund taxes" pursuant to 26 USC § 7501; Begier v. Internal Revenue Service, 496 US 53, 110 SCt 2258 (1990).

4 ABR 524

2.3. MarkAir, Inc. failed to pay the collected trust fund taxes to the United States in an amount to be determined.

2.4. Neil Bergt was a responsible person within the meaning of 26 USC § 6672, during the periods from January 1, 1992, through at least June 8, 1992, because he had significant control over which creditors were paid. Purcell v United States, 1 F3d 932, 936-37 (9^th Cir 1993)

2.5. Neil Bergt was "willful" within the meaning of § 6672, during the quarters at issue, because he either knew during the period from January 1, 1992, through June 8, 1992, that transportation excise taxes were not being paid or that there was a grave risk that the trust fund taxes would not be paid, and he was in a position to find for certain very easily whether the trust fund taxes were being paid. Purcell, 1 F3d at 937-939 (9^th Cir 1993); Davis v United States, 961 F2d 867, 871-77 (9^th Cir 1992) (use of after-acquired funds to pay corporate debts aside from the trust fund taxes by the same person responsible to collect and pay over, as opposed to new management, gives rise to liability for the "responsible party" under § 6672), cert den 113 SCt 969; Buffalow v United States, ____ F3d ____, 1997 WL 123680 (9^th Cir 1997) (a good motivation to keep the business alive in order to pay taxes is not sufficient to void a finding of willfulness); Phillips v United States, 73 F3d 939 (9^th Cir 1996) (negligence not sufficient to establish willfulness, but reckless disregard may be).

2.6. From the date of the chapter 11 filing through June 30, 1992, MarkAir, Inc. operated as a debtor-in-possession. The court makes no conclusion about Neil Bergt's liability during this post-filing period. It will be left to a second phase of the trial to determine: (a) what amount is due for the entire period from January 1, 1992, through June 30, 1992; (b) whether there should be a proration of Bergt's liability between the prepetition and postpetition periods; and (c) whether Bergt has a defense for the second quarter air transportation excise tax deficiency due to the intervention of a bankruptcy filing before the end of the second quarter.

LET A PARTIAL JUDGMENT ENTER ACCORDINGLY.

DATED: April 28, 1997