                       United States Court of Appeals
                              FOR THE EIGHTH CIRCUIT
                                  ___________

                                  No. 97-1404
                                  ___________
United States of America,               *
                                        *
            Plaintiff-Appellee,         *   Appeal from the United States
                                        *   District Court for the
     v.                                 *   District of South Dakota.
                                        *
First Dakota National Bank,             *
                                        *
            Defendant-Appellant.        *
                                        *

                                  ___________

                         Submitted: October 23, 1997
                                       Filed: March 6, 1998
                                 ___________

Before RICHARD S. ARNOLD, Chief Judge, LOKEN and HANSEN, Circuit Judges.
                               ___________

HANSEN, Circuit Judge.

      First Dakota National Bank (First Dakota) appeals the district
court’s1 grant of judgment as a matter of law in favor of the United States
in this action to collect interest due on a past tax liability of American
State Bank (American State), whose assets and liabilities First Dakota
purchased in 1988 when American State went under. First Dakota argues that
the district court erred in granting the government judgment




      1
        The Honorable Charles B. Kornmann, United States District Judge for the
District of South Dakota.
as a matter of law, because American State’s failure to disclose a pending
Internal Revenue Service (IRS) audit was material to First Dakota’s
decision to purchase American State’s assets.

        The United States filed the complaint in this case against First Dakota, seeking to recover unpaid interest
due to the IRS in the amount of $37,574.67. This interest liability arose from a tax deficiency in the 1981
consolidated corporate income tax return of American State and American Banshares, Inc., the holding company
that owned over 96% of American State’s stock. The IRS discovered the tax deficiency in 1988 while conducting
an audit of American State. Early in the investigation, the IRS agent involved in the audit, Doug Uthe, told
American State’s president that it was likely American State would receive a refund of approximately $25,000
due to its substantial net operating losses. After further investigation, however, the IRS audit revealed the tax
deficiency from 1981, on which interest had accrued. This “restricted interest” had accrued during the period
from 1981 until the time when the 1981 tax deficiency was eliminated by a carry-back of American State's
subsequent net operating losses. Ultimately, in 1990, the IRS assessed the interest in the amount of $37,574.67.
The correctness of the amount is not disputed in this appeal.

        In 1988, prior to the assessment of the interest at issue here, and with the aid of an assistance agreement
with the FDIC, First Dakota purchased the assets and assumed all the liabilities of American State with knowledge
that American State’s liabilities exceeded its assets. First Dakota contends that the IRS audit was not disclosed
at the time it was negotiating the purchase agreement, and that its knowledge of the audit would have altered its
negotiation position. The government assessed American State’s interest liability as indicated above in 1990,
subsequent to First Dakota’s closing on the bank purchase agreement and its acquisition of American State assets
and liabilities.

        The government brought this action to recover the interest from First Dakota, the new owner of American
State’s assets. As affirmative defenses to this action, First




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Dakota asserted that the government’s claim is barred by provisions of both the FDIC assistance agreement and
the contractual purchase agreement, wherein American State warranted that it had filed all tax returns, that each
was complete and accurate in all material respects, and that there was no investigation or proceeding pending or
threatened against American State before any governmental agency at the time of the purchase.2 First Dakota
asserted that American State breached its contractual warranties by not disclosing the audit when the purchase
transaction was pending.

         First Dakota demanded a jury trial. The district court concluded as a matter of law that American State
had filed complete and accurate tax returns as it had warranted it had done in the purchase agreement and that First
Dakota had agreed to assume the liability. The only issue sent to the jury as an affirmative defense was the
question of whether knowledge of the IRS audit would have been material to First Dakota in the purchase
transaction. The jury found in favor of First Dakota. Following the verdict, however, the district court granted
the government’s renewed motion for judgment as a matter of law.

         The district court concluded as a matter of law that First Dakota failed to prove it had no knowledge of
the audit or that knowledge of the audit would have been a material consideration in this transaction. In reaching
this conclusion, the district court considered that the audit was in progress but had not been completed at the time
of the transaction, that First Dakota had assumed far riskier liabilities than the interest liability that resulted from
the audit, and that at the time of the purchase transaction, the testimony indicated everyone involved, including
the IRS agent performing the audit, thought that American State would be entitled to a refund due to its large
losses. Thus, the district court concluded that the evidence was not sufficient for the jury to find that




         2
       First Dakota also raised affirmative defenses based on the statute of limitations
and failure to state a claim, neither of which is at issue in this appeal.

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knowledge of the audit would have materially altered the transaction. First Dakota appeals.


        We review de novo the district court’s grant of judgment as a matter of law, applying the same standards
as the district court. Triton Corp. v. Hardrives, Inc., 85 F.3d 343, 345 (8th Cir.1996). We must resolve all
conflicts in favor of the nonmoving party, giving the nonmoving party the benefit of all reasonable inferences.
Id.  ?We will not weigh, evaluate, or consider the credibility of the
evidence.” Id.

       The IRS may collect tax liabilities from the transferee of property transferred by a taxpayer. See 26
U.S.C. § 6901(a) (1994). This is a procedural statute which does not create or define substantive liability.
Commissioner of Internal Revenue v. Stern, 357 U.S. 39, 42 (1958). Therefore, the existence and extent of
liability of a transferee of property of a taxpayer is determined by state law. Id. at 44. We apply de novo review
to the district court’s interpretation of state law. Salve Regina College v. Russell, 499 U.S. 225, 231 (1991).

       First Dakota's defense theory, upon which the case was tried, was that it could defend against the
government's claim on the basis that American State and the FDIC had failed to disclose the potential interest
liability at the time First Dakota negotiated the purchase of American State. Generally, under South Dakota law,
there is no successor liability for a purchasing corporation when the acquisition takes the form of a purchase of
assets. Groseth Intern., Inc. v. Tenneco, Inc., 410 N.W.2d 159, 169 (S.D. 1987). Four exceptions exist to this
general rule, including among them that a purchasing corporation is liable for the debt of the selling corporation
“[w]hen the purchasing corporation expressly or impliedly agrees to assume the selling corporation's liability.”
Id. In this case, First Dakota expressly agreed that, on the closing date, it would assume and pay “the deposit and
all other liabilities and obligations of Seller [American State] as such liabilities and obligations may then exist.”
(Purchase Agreement at ¶ 2.) In spite of this express assumption of liability, First Dakota




                                                        -4-
attempts to avoid liability by asserting that American State breached the purchase agreement and the FDIC
assistance agreement by breaching its warranties that it had paid all taxes and that no government agency litigation
was pending or threatened at the time of the agreement.

         General case law from South Dakota indicates that “a material breach of one aspect of the contract
constitutes a material breach of the whole contract.” Talley v. Talley, 566 N.W.2d 846, 851 (S.D. 1997). While
“[r]escission is not generally permitted for casual, technical, or unimportant breaches of the contract,” it may be
allowed where the breach is “substantial and relate[s] to a material part of the contract." Id. at 852 (internal
quotations omitted). Under this authority, a breach of a warranty could be a valid affirmative defense if the alleged
breach of warranty is substantial and relates to a material part of the contract.

        The jury determined (1) that First Dakota did not know of the IRS audit at the time of closing on the
purchase agreement because American State failed to disclose the audit; and (2) that the failure to disclose was
material to First Dakota’s agreement to assume all liabilities of American State. However, we agree with the
district court’s determination that the failure to disclose the audit, as a matter of law, was not material to First
Dakota’s agreement to purchase American State’s assets and assume its liabilities.

       The interpretation of a contract is a question of law for the court. Houser v. Houser, 535 N.W.2d 882,
884 (S.D. 1995). The contract clearly indicates an intention to assume all liabilities, known or unknown, by
unqualifiedly stating that First Dakota assumes “all other liabilities and obligations of Seller [American State] as
such liabilities and obligations may then exist.” (Purchase Agreement at ¶ 2.). The agreement does not indicate
an intention to limit First Dakota’s liability to only those liabilities known at the time of the agreement. In this
case, the known liabilities at the time of the agreement exceeded the $65 million in assets to be transferred. In this




                                                        -5-
context, an additional interest liability of slightly over $37,000 could not have materially altered the transaction.
Further, while the extent of the tax liability was not known at the time of closing, the evidence is uncontradicted
that all who knew of the pending IRS audit generally expected it to result in a tax refund, not a liability. American
State’s president had been informed by the auditor to expect a refund in the neighborhood of $25,000. Disclosing
this known information to First Dakota would not have materially altered the negotiations. The facts simply are
insufficient to support a finding that knowledge of the tax audit would have been material to the purchase
agreement.

      We have considered all of First Dakota’s arguments and find them to
be without merit. We conclude that the district court committed no error
of fact or law. Accordingly, we affirm the judgment of the district court.


        A true copy.

                 Attest:

                          CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.




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