The Trap

When Howard tells his story to audiences like the one at Wake Tech, he simplifies this part of the story, leaving out the litigation over who would be held responsible for the nonpayment. He says he understands the judge's reasoning but still feels wronged by the decision. He's also angry that, although he ended up being held personally responsible for the unpaid payroll taxes, the IRS never personally notified him of that growing debt while it might have been manageable, instead sending notices to the company that he says he never saw. "The government says that as the owner, you are the most responsible, but I'd been held in the dark," Howard says. "In my opinion, I still don't think I was the responsible party."

As in most cases of payroll tax delinquency, which the IRS terms nonpayment rather than fraud, no one appears to have gained personally from the deception; it merely postponed--and exacerbated--the company's failure. As the sole owner of the business, Howard had the most to lose from the nonpayment, especially since he was negotiating with investors who could have sued him for fraud had the deal gone through without disclosure of a six-figure tax liability. But Beyer doesn't appear to have had any motivation either, something the judge pointed out in his ruling.

Brian Hamilton, the financial consultant, believes Howard. "But Chuck didn't ask, 'Hey, Karl, are you paying the payroll taxes?'" says Hamilton, now CEO of a financial information company where he has hired Howard as a consultant. "It would take a lot of guts to volunteer that, to give Chuck bad news." Bill Bilger, who still plays golf with Howard from time to time, calls his old boss "an excellent speaker, a salesman, and an honest man" but admits that finances weren't Howard's area and that he never had the time or inclination to figure out what was going on.

As word spread, employees began to focus on how to get out unscathed. Hamilton describes what happened like this: "When the s--- hit the fan, the rats started jumping off the ship. When you're winning you're popular, but when you're losing no one wants to be around you. What happened to Chuck really bothered me a lot." Adds Salvagni, who, with Howard's blessing, took a large portion of the operations team and moved to another company: "People didn't want to be in too deep in this any which way. They were more scared than anything else. There was no reviving the business--it was dead."

Through the spring of 1999, Howard tried to keep up appearances, continuing to work on projects and using incoming receivables to pay the IRS. That seemed like a logical plan for wrapping up a business and dealing with its debt, but as Howard learned the hard way, it also put him on the wrong end of the tax rules. The bankruptcy judge faulted him for ignoring his obligations to the bank and the bonding company, both of which had rights to those receivables, and for paying others (payroll, rent, etc.) before paying the IRS. "It's not intuitive," says GJ Stillson MacDonnell, a tax attorney in San Francisco.

As with many entrepreneurs, Howard's personal finances and those of his business were inextricably intertwined. Even with the company on the brink of folding, he continued to receive a salary, yet he also transferred $33,000 of his own money to cover payroll and personally paid the company's portion of the health insurance benefits for its (now dwindling) employees. Howard says he wanted to keep paying his employees as long as possible and to finish projects he had promised to do. He also hoped to keep money coming in for as long as possible to pay down the tax debt, and he sent the IRS $74,000 in the company's final days. "I did everything I could possibly do to minimize the loss to everybody," Howard says. "I did everything as legal as I possibly could."

But with Howard Roofing not paying all of its bills, the local sheriff eventually came, changed the locks, and repossessed the company car that Howard had been driving. On June 3, 1999, Howard filed bankruptcy for the company and for himself and his wife. By the time of the corporate filing, in U.S. Bankruptcy Court for the Eastern District of North Carolina, Howard Roofing's listed assets of $1.4 million were dwarfed by liabilities of $2.6 million. His personal bankruptcy filing showed liabilities four times greater than assets. "I sat around and cried for a week or two," he says. "I couldn't function, couldn't eat, couldn't sleep."

One of the worst moments involved a $1,748 check to a Virginia hotel where some of his workers had stayed. The check bounced, and a warrant was issued for Howard's arrest for not showing up in court in Virginia. Two days before the bankruptcy filing, two cops approached him in the company parking lot. "They handcuffed me and put me in the back of the police car," he says. "They took me downtown, took my wallet, my belt, and my shoelaces. It was a horrible, awful, humiliating experience."

After declaring bankruptcy, Howard went to work for a friend with a siding business and tried to process what had happened. "People look at you differently," he says. "People treat you differently, and you're a leper to the banking community. The people that aren't your friends are like, 'Poor Chuck, he went"--he adopts a loud whisper--"bankrupt.'" Along with losing the business, Howard also lost the house that he had custom-designed and built in Cary just a few years earlier. In North Carolina, you can keep a maximum of $10,000 in equity per person in your residence in bankruptcy, so at the advice of his attorney, Howard and his wife and kids moved out of the house. With the help of his parents, they moved into a new house in nearby Apex. When he talks about how his wife, Penny, stood by him, Howard starts to cry. "She's an angel," he says.

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