In the
United States Court of Appeals
For the Seventh Circuit

No. 00-1733

Lee N. Mortenson,

Plaintiff-Appellant,

v.

National Union Fire Insurance Company
of Pittsburgh, Pa.,

Defendant-Appellee.

Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 99 C 2419--Suzanne B. Conlon, Judge.

Argued December 6, 2000--Decided May 4, 2001



  Before Bauer, Posner, and Williams, Circuit
Judges.

  Posner, Circuit Judge. This is a
diversity suit, governed by Illinois law,
seeking the proceeds of a directors’ and
officers’ liability policy. The
plaintiff, Lee Mortenson, who was the
president of Opelika Manufacturing
Company, appeals from the grant of
summary judgment to the insurance
company. The appeal requires us to
determine whether the statutory penalty
imposed on responsible persons for
willful nonpayment of payroll taxes is a
"penalty" within the meaning of an
exclusion in the D&O policy.

  The policy, issued in 1982, covers
claims made between August 1982 and
August 1985 that resulted in losses to
directors or officers by reason of any
"wrongful act" committed by them in the
course of their corporate duties. But the
policy excludes losses consisting of
"fines or penalties imposed by law or
other matters which may be deemed
uninsurable under the law pursuant to
which this policy shall be construed."
Mortenson became president of Opelika in
1984, at a time when the company was
experiencing financial distress as a
result of which it had in May of that
year, three months before he assumed
office, failed to remit more than
$100,000 in payroll taxes due the federal
government. Mortenson learned about this
default in November and told his
financial officers that he didn’t want to
see a repetition of it, but he took no
disciplinary steps against the people
responsible for the default and he
instituted no measures to prevent its
recurrence. On the contrary, he
participated in efforts by the company to
identify creditors whom the company could
persuade to allow late payment, though he
should have known that by picking and
choosing among creditors he was inviting
his underlings to put the Internal
Revenue Service last (more on that
later). And, sure enough, in December of
1984 and the first two months of the
following year, Opelika again failed to
pay its payroll taxes, while continuing
to pay other, more exigent creditors.

  The IRS discovered the defaults and in
July 1985 hit Mortenson with a proposed
assessment of 100 percent of the past-due
taxes, pursuant to 26 U.S.C. sec.
6672(a), which makes any person
responsible for collecting, accounting
for, and paying over payroll taxes who
"willfully" fails to do any these things
"liable to a penalty equal to the total
amount of tax evaded, or not collected,
or not accounted for and paid over." The
government sued Mortenson to collect the
penalty, and eventually the parties
settled the suit for $900,000--for which
loss the insurance company has refused to
reimburse him.

  The insurance policy does not define
"penalties," and Mortenson argues that
therefore it is ambiguous and we must
interpret the term as favorably to
Mortenson as reason allows. So
interpreted, the term does not, he
continues, encompass the penalty imposed
by section 6672(a), because it is not
"really" a penalty. He offers a number of
reasons why it is not. One is that the
aim is to collect taxes rather than to
punish the willfully delinquent
responsible person, as shown by the fact
that it is the policy of the
InternalRevenue Service not to use the
statute to collect more than the total
amount of unpaid tax. Levit v. Ingersoll
Rand Financial Corp., 874 F.2d 1186, 1191
(7th Cir. 1989). So if the unpaid tax
were $250,000, which would make each
responsible person who had willfully
failed in his duty to see to its payment
liable for a $250,000 penalty, the total
penalties assessed against all those
responsible persons would be capped at
$250,000. For example, if the IRS was
able to collect $100,000 of the $250,000
in unpaid tax from the company itself,
the penalties collected from the
responsible persons would be capped at
$150,000.

  Mortenson argues further that a number
of cases, though only one involving the
interpretation of an insurance policy,
St. Paul Fire & Marine Ins. Co. v.
Briggs, 464 N.W.2d 535 (Minn. App. 1990),
describe the section 6672(a) penalty as
not really a penalty. United States v.
Sotelo, 436 U.S. 268, 275 (1978); Monday
v. United States, 421 F.2d 1210, 1215-16
(7th Cir. 1970); Aardema v. Fitch, 684
N.E.2d 884, 887-89 (Ill. App. 1997). Only
the last of these cases supports his
position. Briggs and Monday say merely
that the section 6672(a) penalty is not a
criminal penalty, which is correct but
irrelevant; and Briggs went on to hold
that the section 6672(a) penalty was in
any event uninsurable as a matter of law,
464 N.W.2d at 539, a holding that would
do in Mortenson as well. The issue in
Sotelo was not whether the section
imposes a penalty, but, as explained in
Duncan v. Commissioner, 68 F.3d 315, 318
(9th Cir. 1995), which holds that the
section does impose a penalty, whether a
debt based upon it is dischargeable in
bankruptcy--and the Court held that it
was not. Aardema v. Fitch, supra, 684
N.E.2d at 890, which involved a state
statute that allows (as the federal
statute now does, 26 U.S.C. sec. 6672(d))
a responsible person against whom the
penalty has been assessed to seek
contribution from other responsible
persons who may be liable, does state
that "section 6672 is merely a collection
device for the government and is not
meant to punish," though Wynne v.
Fischer, 809 S.W.2d 264 (Tex. App. 1991),
which involves the same issue, is
squarely contra. Mortenson adopts the
argument of Aardema and adds that a
penalty is a punishment for deliberate
wrongdoing, of which the willfulness
required for liability under section
6672(a) is, he contends, only a pale
shadow.
  Taking the last point first, we point
out that penalties are frequently imposed
for conduct well short of deliberate
wrongdoing. Reckless and negligent
homicide are crimes, fines are imposed
for speeding even when the driver was
unaware that he was exceeding the speed
limit, and there are even strict
liability crimes, where the defendant’s
state of mind is irrelevant and even the
fact that he could not have prevented the
criminal act from occurring is not a
defense. See, e.g., United States v.
Park, 421 U.S. 658, 670-73 (1975); United
States v. Freed, 401 U.S. 601, 607-10
(1971); Mueller v. Sullivan, 141 F.3d
1232, 1235-36 (7th Cir. 1998); United
States v. Hogan, 89 F.3d 403, 404 (7th
Cir. 1996); United States v. Torres-
Echavarria, 129 F.3d 692, 697-98 (2d Cir.
1997); cf. State v. Yanez, 716 A.2d 759,
763 (R.I. 1998). Willfulness within the
meaning of section 6672(a) "means that
the person either knew the taxes were not
being turned over to the government and
nonetheless opted to pay other creditors,
or recklessly disregarded a known risk
that the taxes were not being paid over."
United States v. Kim, 111 F.3d 1351,
1357-58 (7th Cir. 1997); see also Monday
v. United States, supra, 421 F.2d at
1215-16; Phillips v. Internal Revenue
Service, 73 F.3d 939, 942 (9th Cir.
1996); Malloy v. United States, 17 F.3d
329, 332 (11th Cir. 1994). We went
further and held in Wright v. United
States, 809 F.2d 425, 427-28 (7th Cir.
1987), that gross negligence is
sufficient to constitute willfulness
under the statute.

  Although it is true that the Internal
Revenue Service caps the penalty at the
amount of tax due, this is not a
statutory limitation; it is simply an
enforcement policy. Levit v. Ingersoll
Rand Financial Corp., supra, 874 F.2d at
1191; Duncan v. Commissioner, supra, 68
F.3d at 318. The fact that the statute
now allows contribution does not cap the
penalty at the amount of taxes either, or
for that matter impose any other ceiling.
Contribution is not about total
liability, but about its allocation among
the wrongdoers. In a case in which the
amount of tax due was $250,000, and two
responsible persons were each liable for
the penalty, the government could if it
wanted assess and collect $250,000 from
each. The two would be free to seek
contribution from other responsible
persons, perhaps even to rearrange the
liability voluntarily between themselves
by means of an indemnity agreement, as
held in Lostocco v. D’Eramo, 518 S.E.2d
690, 696 (Ga. App. 1999); but their
obtaining contribution whether from each
other or from others would not change the
fact that the government had collected
penalties twice as great as the amount of
taxes owed. And finally the fact that the
IRS uses section 6672(a) as a collection
device does not distinguish it from a
number of unmistakably criminal
penalties, such as those for minor
thefts, vandalism, and other minor
property crimes, where the police use the
threat of prosecution to induce the
wrongdoer to make restitution to his
victim more often than they actually
prosecute.

  We conclude that section 6672(a) imposes
the civil counterpart of a fine. Monetary
penalties for wrongful conduct are civil
fines, and are encompassed by the "fines
or penalties" provision in the insurance
policy. Any other conclusion would inject
extreme uncertainty into the
interpretation of insurance policies.
Whether a penalty so designated in the
statute creating it, a penalty that on
its face is a civil fine, was a penalty
within the meaning of the policy
exclusion would require a searching and
often indeterminate inquiry into the
history and function and interpretation
and details of the statutory scheme.
Alerted to this concern by the court’s
questions at argument, Mortenson’s lawyer
suggested that the policy could be
rewritten to exclude "penalties that are
called penalties in the statutes that
create them." That would stop inquiry at
the face of the statute. It is a good
suggestion, but the possibility of making
an insurance policy clearer doesn’t imply
that it is unclear in its present form.
Anyone reading the insurance policy at
issue in this case--and remember that a
D&O policy is purchased by a firm, not by
an individual, and protects business
executives, not the average consumer--
would think that the term "penalties and
fines" covered exactions described as
penalties or fines in the statutes
imposing them. The reader would not think
the exclusion limited to a subset of
penalties and fines impossible to
identify without a protracted inquiry
with an unpredictable outcome.

  We have yet to mention the most
compelling argument against the
interpretation for which Mortenson
contends. For obvious reasons, insurance
companies try to avoid insuring people
against risks that having insurance makes
far more likely to occur. The temptation
that insurance gives the insured to
commit the very act insured against is
called by students of insurance "moral
hazard" and is the reason that fire
insurance companies refuse to
insureproperty for more than it is worth-
-they don’t want to tempt the owner to
burn it down. Consider the likely effects
of insuring against the section 6672(a)
penalty. When a firm gets into financial
difficulties and creditors are pressing
it for repayment, the firm tries--Opelika
tried--to pay the most pressing creditors
currently and hold off the others till
later. See C. Richard McQueen & Jack F.
Williams, Tax Aspects of Bankruptcy Law
and Practice sec. 19:14, p. 19-18 (3d ed.
1997). This tendency is one of the
reasons for the rules against preferences
in bankruptcy, see 11 U.S.C. sec. 547; In
re Midway Airlines, Inc., 69 F.3d 792,
797 (7th Cir. 1995); In re Tolona Pizza
Products Corp., 3 F.3d 1029, 1032 (7th
Cir. 1993), preferences being the
favoring, often, of the most exigent
creditors to the prejudice of the others,
as the firm struggles to stay afloat.
(When it sinks, the rest of the creditors
go down with it.) The temptation to put
the IRS at the end of the line is great.
The IRS is unlikely to be aware that the
firm is in difficulty, and if the firm
decides therefore not to remit payroll
taxes as they come due, but to favor the
creditors who are threatening to seize
the firm’s assets or petition it into
bankruptcy, the IRS is unlikely even to
notice for some time that it is being
stiffed. By the time it wakes up, the
firm will probably be unable to pay the
taxes that it failed to remit. It is to
prevent firms from yielding to the
temptation to put the IRS at the end of
the creditor queue that Congress has
imposed liability for nonpayment of
payroll taxes on the responsible officers
of the firm. For those persons to be
insured against this liability will tempt
them to do just what Opelika did here and
what the penalty provision of section
6672(a) is designed to prevent--pay other
creditors first, funding the preference
by not paying the IRS at all. It would be
ironic to use the IRS’s policy of lenity
in forgoing multiple collection of the
statutory penalty to reduce the
likelihood of its collecting the taxes
for the nonpayment of which the penalty
is imposed.

  It is strongly arguable, indeed, that
insurance against the section 6672(a)
penalty, by encouraging the nonpayment of
payroll taxes, is against public policy,
so falling under the last clause of the
policy exclusion and possibly under the
rule in Illinois as elsewhere that
forbids certain types of insurance as
being against public policy because of
the acute moral hazard that the insurance
creates. A familiar example is taking out
a life insurance policy on another
person’s life without his consent.
Connecticut Mutual Life Ins. Co. v.
Schaefer, 94 U.S. 457, 460 (1878);
Harley-Davidson, Inc. v. Minstar, Inc.,
41 F.3d 341, 343 (7th Cir. 1994); Fisher
v. Angelone, 163 F.3d 835, 839 (4th Cir.
1998). But closer to this case is the
rule that forbids insuring against
criminal fines, see, e.g., Beaver v.
Country Mutual Ins. Co., 420 N.E.2d 1058,
1060 (Ill. App. 1981); Northwestern
National Casualty Co. v. McNulty, 307
F.2d 432, 440-41 (5th Cir. 1962)--a rule
that Illinois courts have extended to
punitive damages, Bernier v. Burris, 497
N.E.2d 763, 776 (Ill. 1986); Beaver v.
Country Mutual Ins. Co., supra, 420
N.E.2d at 1060, a form of civil penalty
and, in one case, Crawford Laboratories,
Inc. v. St. Paul Ins. Co., 715 N.E.2d 653
(Ill. App. 1999), to civil penalties
explicitly so designated. We need not
decide, however, whether insuring
against the section 6672(a) penalty falls
within this ban. For purposes of
interpreting this insurance policy, a
penalty is a penalty is a penalty.

Affirmed.
