Alan S. Trust, United States Bankruptcy Judge.
Pending before the Court are the following: (I) the motion for summary judgment filed by Sheet Metal Workers' Pension Fund ("Pension Fund"), National Energy Management Institute Committee for the Sheet Metal and Air Conditioning Industry ("NEMIC"), Sheet Metal Occupational Health Institute Trust ("SMOHIT"), International Training Institute for the Sheet Metal and Air Conditioning Industry ("ITI"), and National Stabilization Agreement of the Sheet Metal Industry Fund ("SASMI," and collectively, "Plaintiffs" or the "Benefit Funds") (the "Summary Judgment Motion") [dkt item 26]; (II) the cross-motion for summary judgment filed by Richard Kern ("Kern," "Debtor" or "Defendant") ("Defendant's Cross-Motion for Summary Judgment") [dkt item 28]; and (III) Plaintiffs' Memorandum of Law in Further Support of Plaintiffs' Motion for Summary Judgment and in Opposition to Defendant's Motion for Summary Judgment (the "Plaintiffs' Opposition," together with Plaintiffs' Summary Judgment Motion, Defendant's Cross-Motion for Summary Judgment, the "Motions"). [dkt items 35, 36 and 38].
Each of the Plaintiffs are benefit funds established under the statutory framework of ERISA. Debtor was the principal owner and control person of a closely held company which employed persons who were entitled to have contributions made on their behalf to the Benefit Funds. The issue before the Court is whether $1,369,803.98 of unpaid contributions due to these Benefit Funds are non-dischargeable debts pursuant to § 523(a)(4) of the
This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A), (I), and (O), and 1334(b), and the Standing Orders of Reference in effect in the Eastern District of New York dated August 28, 1986, and as amended on December 5, 2012, but made effective nunc pro tunc as of June 23, 2011. Furthermore, this Court has the authority to enter a final order in this nondischargeability action. See In re Salim, Case No. (ESS), Adv. Pro. No. 13-01442(ESS), 2015 WL 1240000, at *1-2, 2015 Bankr.LEXIS 815 at *3-5 (Bankr.E.D.N.Y. Mar. 16, 2015).
The Court is not stating findings of facts and conclusions of law because Rule 7052 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"), incorporating Rule 52(a)(3) of the Federal Rules of Civil Procedure, does not so require in ruling on a motion for summary judgment. FED. R. BANKR. P. 7052.
On April 3, 2014, Debtor commenced a voluntary petition for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code").
On September 17, 2013, Debtor's case was converted from a case under Chapter 11 to a case under Chapter 7. [dkt item 76]
On January 29, 2014, Debtor received his discharge under Chapter 7. [dkt item 96]
On June 19, 2013, Plaintiffs timely commenced this adversary proceeding seeking a denial of Debtor's discharge pursuant to 11 U.S.C. §§ 727(a) and (c)(1) and a determination of nondischargeability under § 523(a)(4) (the "Complaint"). [dkt item 1]
On July 30, 2013, Defendant filed an answer to the Complaint asserting general denials. [dkt item 6]
On August 6, 2013, the Court entered an Initial Adversary Scheduling Order. [dkt item 7]
On December 5, 2013, the Court entered a Discovery Scheduling Order. [dkt item 13]
On December 6, 2013, the Court approved a stipulation permitting Plaintiffs to amend their Complaint. [dkt item 15]
On December 9, 2013, Plaintiffs filed an amended complaint (the "Amended Complaint") by which they withdrew their cause of action pursuant to 11 U.S.C. § 727(a) and (c)(1), and now seek only a determination of nondischargeability of the ERISA contributions pursuant to 11 U.S.C. § 523(a)(4). [dkt item 16] Plaintiffs.
On April 1, 2014, the Court entered an Adversary Pre-Trial Scheduling Order. [dkt item 21]
On April 17, 2014, Defendant filed an answer to the Amended Complaint asserting general denials. [dkt item 22]
On May 5, 2014, the Court entered an Amended Adversary Pre-Trial Scheduling Order, with a trial date scheduled for October 2, 2014. [dkt item 23]
On July 24, 2014, Plaintiffs filed their Summary Judgment Motion. [dkt item 26]
On August 18, 2014, Defendant filed his Cross-Motion for Summary Judgment. [dkt item 28]
On September 8, 2014 and September 9, 2014, Plaintiffs filed their Opposition to Defendant's Cross-Motion for Summary Judgment. [dkt items 35, 36 and 38]
On September 10, 2014, the Court heard oral arguments on the Motions and took the Motions on submission.
Plaintiffs are and were national and local employee benefit plans within the meaning of Section 3(3) of ERISA, 29 U.S.C. § 1002(3).
CSI was an employer within the meaning of Section 3(5) of ERISA, 29 U.S.C. § 1002(5).
The Benefits Funds are expressly third party beneficiaries of the CBA's.
Most relevant here the CBA's provide:
(emphasis added).
Defendant, in his capacity as principal of CSI, employed persons who were participants in the Benefits Funds within the meaning of Section 3(7) of ERISA, 29 U.S.C. § 1002(7), while the CBA's were in full force and effect.
As the principal owner of CSI, Kern exercised authority, control and management over the disposition of assets of CSI, had decision making authority with respect to whether or not to pay the obligations of CSI and which accounts payable were to be paid by CSI, and determined whether or not and when CSI made contributions to the Benefits Funds.
On December 1, 2011, CSI was terminated by Plaintiffs as a pension fund contributory employer (the "Termination"). See Defendant's Statement, ¶ 3; Kern Aff., ¶ 12 and Exhibit 2 annexed thereto; Plaintiffs' Reply Statement, ¶ 3. As a result, CSI could no longer make pension contributions for any of the union members it employed. This Termination lead to a loss of union employees and contributed to CSI's inability to continue its business operations. See Defendant's Statement, ¶ 4; Kern Aff., ¶ 13. As of the Termination, Debtor and CSI owed $1,369,803.98 of unpaid contributions to the Benefit Funds.
Prior to the Termination, CSI paid at least $455,165.00 of the contributions owed under the 2010 Judgment. See Defendant's Statement, ¶ 5; Kern Aff., ¶ 16. Also, prior to the Termination, Kern had personally paid at least $150,000.00 of the contributions owed to the Benefit Funds under the 2012 Judgment. See Defendant's Statement, ¶ 6; Kern Aff., ¶ 17 and Exhibit 12.
In order to keep CSI operating, Kern and Sharon Kern (Kern's wife) personally contributed $577,392.00 of their own funds into CSI's operations from September 11, 2010 through February 7, 2012 by direct cash deposits; the vast bulk of these were contributed prior to the Termination. See Defendant's Statement, ¶ 8; Kern Aff., ¶ 24, Affidavit of Sharon Kern ("Sharon Kern Aff."), ¶ 5 and Exhibits 13 and 14 attached thereto; Plaintiffs' Reply Statement, ¶ 8.
Kern and Sharon Kern paid direct obligations of CSI's totaling $45,446.49 during the end of 2011 and beginning of 2012; the bulk of these were paid prior to the Termination. See Defendant's Statement, ¶ 9; Kern Aff., ¶ 25, Sharon Kern Aff., ¶ 5 and Exhibit 14 attached thereto; Plaintiffs' Reply Statement, ¶ 9.
From January 1, 2009 until March 31, 2010, Kern received approximately $257,405.00 of salary from CSI. See Defendant's Statement, ¶ 11; Kern Aff., ¶¶ 22-23 and Exhibits 9, 10 and 11 attached thereto; Plaintiffs' Reply Statement, ¶ 11.
From January 1, 2009 until March 31, 2010, Sharon Kern received approximately $78,360.00 of salary from CSI. See Defendant's Statement, ¶ 12; Kern Aff., ¶ 24 and Exhibits 9, 10 and 11 attached thereto; Sharon Kern Aff.; Plaintiffs' Reply Statement, ¶ 12.
From March 1, 2010 until August 31, 2011, Kern received approximately $192,689.00 of salary from CSI. See Defendant's Statement, ¶ 13; Kern Aff., ¶ 23; Plaintiffs Reply Statement, ¶ 13.
From August 1, 2010 until August 31, 2011, Sharon Kern received approximately $64,200.00 of salary from CSI. See Defendant's Statement, ¶ 14; Kern Aff., ¶ 23; Plaintiffs Reply Statement, ¶ 14.
Plaintiffs concede that there is no issue in this case about the misuse or misappropriation by Debtor of funds collected from employees, and that the sole issue is the failure of CSI to make various contributions to the Benefit Funds. Plaintiffs contend: (i) the CBA's and the statutory framework of ERISA render all funds collected by CSI as trust funds held for the benefit of the Benefit Funds; (ii) Debtor's failure to pay any contributions to the Benefit Funds from any funds collected by CSI was a defalcation by Debtor while acting as an ERISA fiduciary within the meaning of Bankruptcy Code § 523(a)(4); and (iii) therefore, the unpaid contributions owed to Plaintiffs are nondischargeable. Defendant argues that he was not a fiduciary under either ERISA or as defined by the Bankruptcy Code and, in the alternative, that no defalcation occurred; as a result, the unpaid contributions owed to Plaintiffs are dischargeable.
Rule 56(c) of the Federal Rules of Civil Procedure, as incorporated by Bankruptcy Rule 7056(c), provides that summary judgment should be granted to the moving party if the Court determines that "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 322 n. 4, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (quoting FED. R. CIV. P. 56(c)) (internal quotation marks omitted). A movant has the initial burden of establishing the absence of any genuine issue of material fact. Celotex, 477 U.S. at 322-23, 106 S.Ct. 2548. A fact is "material" if it "might affect the out-come of the suit under the governing law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). An issue of fact is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id. If the movant meets its initial burden, the nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). "If the evidence is merely colorable, or is not significantly probative, summary judgment may be granted." Anderson, 477 U.S. at 249-50, 106 S.Ct. 2505 (internal citations omitted). The Second Circuit has repeatedly noted that, "[a]s a general rule, all ambiguities and inferences to be drawn from the underlying facts should be resolved in favor of the party opposing the motion, and all doubts as to the existence of a genuine issue for trial should be resolved against the moving party." Brady v. Town of Colchester, 863 F.2d 205, 210 (2d Cir.1988) (citing Celotex Corp., 477 U.S. at 330 n. 2, 106 S.Ct. 2548 (1986) (Brennan, J., dissenting)); see also Tomka v. Seiler Corp., 66 F.3d 1295, 1304 (2d Cir.1995); Burrell v. City Univ. of New York, 894 F.Supp. 750, 757 (S.D.N.Y.1995). "If, when viewing the evidence produced in the light most favorable to the non-movant, there is no genuine issue of material fact, then the entry of summary judgment is appropriate." Pereira v. Cogan, 267 B.R. 500, 506 (S.D.N.Y.2001); see Burrell, 894 F.Supp. at 758 (citing Binder v. Long Island Lighting Co., 933 F.2d 187, 191 (2d Cir.1991)); see also In re Oak Rock Fin., LLC, 527 B.R. 105, 113 (Bankr.E.D.N.Y. 2015).
Exceptions to discharge under § 523(a) must be strictly construed in favor
A creditor must satisfy three elements to meet the exception to dischargeability under Section 523(a)(4): (1) the existence of an express or technical trust involving the entrusting of money or other property for the benefit of another; (2) debtor must have acted in a fiduciary capacity with respect to the trust; and (3) the debt must arise from a defalcation committed by debtor. Duncan, 331 B.R. at 77; Watterson, 524 B.R. at 451. As is further discussed below, the Supreme Court recently stated that defalcation "includes a culpable state of mind.... one involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior." Bullock 133 S.Ct. at 1757.
"Section 523(a)(4) of the Bankruptcy Code applies only to express or technical trusts, not to constructive trusts, implied trusts, or trusts implied on the basis of wrongful conduct." Duncan, 331 B.R. at 77 (citations omitted); Watterson, 524 B.R. at 451. To establish the existence of an express statutory trust, which Plaintiffs seem to assert exists here, Plaintiffs must show that property or money was entrusted to a "trustee," that a statute creates or identifies a "fiduciary" duty, and that the trust was in place when the defalcation giving rise to the debt occurred. Duncan, 331 B.R. at 77 (citing In re Gunter, 304 B.R. 458, 460-61 (Bankr.D.Colo. 2003) and Citik Ka Wah Bank Ltd. v. Wong (In re Wong), 291 B.R. 266, 278 (Bankr.S.D.N.Y.2003)); Watterson, 524 B.R. at 451.
In Firestone Tire & Rubber Co. v. Bruch, the Supreme Court noted that "ERISA abounds with the language and terminology of trust law." 489 U.S. 101, 110, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989); see also Duncan, 331 B.R. at 77 (citing Friedlander v. Doherty, 851 F.Supp. 515, 520 (N.D.N.Y.1994)) ("Both the language and the legislative history of ERISA suggest that Congress intended traditional concepts of trust law to be applied to cases brought under ERISA.") As the Duncan court noted, terms such as "participant," "beneficiary," "fiduciary," and "trustee," which arise from trust law, appear throughout ERISA. Duncan, 331 B.R. at 77-78 (citing 29 U.S.C. §§ 1002(7) (participant); 1002(8) (beneficiary); 1002(21)(A) (fiduciary); 1103(a) (trustee)).
ERISA Section 403(a) requires that "all assets of an employee benefit plan shall be held in trust by one or more trustees." 29 U.S.C. § 1103(a). "In addition, ERISA provides that the assets of an employee benefit plan `shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan.'" Duncan, 331 B.R. 77-78 (quoting 29 U.S.C. § 1103(c)).
Defendant does not challenge the existence of an ERISA trust. Plaintiffs are and were employee benefit plans within
The fiduciary relationship necessary for a denial of discharge under § 523(a)(4) is determined by federal law. See In re D'Abrosca, Case No., Adv. Pro. No. 09-01070, BAP No. 10-062, 2011 WL 4592338, at *2, 2011 Bankr.LEXIS 3007, at *5 (1st Cir. BAP Aug. 10, 2011); Duncan, 331 B.R. at 80; see also In re Zoldan, 226 B.R. 767, 772 (S.D.N.Y.1998). ERISA provides two mechanisms to establish fiduciary status: (1) an individual or entity may be a fiduciary if named as such under an ERISA plan; see 29 U.S.C. § 1102(a)(2); or (2) ERISA provides for a functional test by which a person or entity may be held to be an ERISA fiduciary, as follows:
29 U.S.C. § 1002(21)(A); see also Mertens v. Hewitt Assocs., 508 U.S. 248, 262, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993) (Supreme Court described ERISA's definition of a fiduciary "not in terms of formal trusteeship, but in functional terms of control and authority over the plan."); Lopresti v. Terwilliger, 126 F.3d 34, 40 (2d Cir.1997). In Lopresti, the Second Circuit determined that a company's president and majority shareholder was an ERISA fiduciary because he had a role in determining which bills to pay, which creditors were to be paid out of the company's general account, and when they would be paid. See also Blatt v. Marshall and Lassman, 812 F.2d 810, 812-13 (2d Cir.1987); Donovan v. Mercer, 747 F.2d 304, 308 (5th Cir.1984); Duncan, 331 B.R. at 80 ("fiduciary status... may result from the exercise of any authority or control respecting management or disposition of [plan] assets"); Liss v. Smith, 991 F.Supp. 278, 302 (S.D.N.Y. 1998).
Cases are split over whether the Bankruptcy Code definition of "fiduciary" and the ERISA definition of "fiduciary" are concentric or merely overlap. The Ninth Circuit Court of Appeals in In re Hemmeter, 242 F.3d 1186, 1190 (9th Cir. 2001) and the Bankruptcy Appellate Panel for the First Circuit in In re Fahey, 482 B.R. 678 (1st Cir. BAP 2012) have each held that persons or entities that fall under ERISA's "functional" test for fiduciary status, also satisfy the fiduciary capacity requirement of § 523(a)(4); however, the Sixth Circuit Court of Appeals in In re Bucci, 493 F.3d 635, 641-42 (6th Cir.2007), cert. denied, 553 U.S. 1093, 128 S.Ct. 2903, 171 L.Ed.2d 841 (2008) and the Eighth Circuit Court of Appeals in Hunter v. Philpott, 373 F.3d 873, 875 (8th Cir.2004), rejected the position that an ERISA fiduciary per se satisfies the fiduciary requirement under § 523(a)(4). The Second Circuit Court of Appeals has not yet ruled on this issue, although courts within the Second Circuit have held that an ERISA "fiduciary" per se satisfies the "fiduciary" standard under § 523(a)(4) of the Bankruptcy Code. See, e.g., Duncan, 331 B.R. at
Plaintiffs rely on Fahey, which held a debtor was a fiduciary with respect to unpaid contributions owed to multiple employee benefit plans. Fahey, 482 B.R. at 696. The B.A.P. there stated that, because the principal, Fahey, "assumed unfettered control over the unpaid contributions (which constitute plan assets), ... and functioned as the only entity with control of deciding whether and when to pay [the entity's] contributions to the Funds ... independent of his status as an ERISA statutory fiduciary, Fahey acted in a fiduciary capacity with respect to the Funds within the meaning of § 523(a)(4)." Judge Kornreich (now retired) dissented. Although he acknowledged that Fahey had exercised authority and control over the pension funds' assets and was responsible for fulfilling contractual obligations to the employee benefit funds, Judge Kornreich reasoned that an individual debtor should not have trust fund duties imposed on him at common law that do not exist under the Internal Revenue Code and may conflict with his duties to creditors under state law. Judge Kornreich stated that holding a debtor to be a fiduciary with respect to unpaid contributions "ignores the fiduciary duties he may have had to ... creditors under Massachusetts law," and aptly stated:
Fahey, 482 B.R. at 696.
This Court agrees with the Fahey dissent analysis from an ultimate liability perspective; however, particularly in light of Bullock, this Court views the ultimate issue here as not being whether Debtor was a fiduciary, but whether or not he committed a defalcation while acting in a fiduciary capacity (discussed infra).
Because ERISA is a federal law and fiduciary status and defalcation under the Bankruptcy Code are also determinations made under federal law, this Court finds no compelling reason to hold that an ERISA fiduciary is not a per se fiduciary for § 523(a)(4) purposes. Thus, this Court will follow the courts that have adopted the per se test — that is, an ERISA fiduciary is a fiduciary for § 523(a)(4) purposes.
The parties do not dispute that Debtor: (1) determined whether or not CSI made timely contributions to the Benefits Funds; (2) exercised authority, control and management over the disposition of assets of CSI and had decision making authority with respect to whether or not to pay the obligations of CSI; (3) had decision making authority with respect to whether or not to pay the obligations of CSI; and (4) decided which accounts payable
Based on the record before this Court, however, Debtor did not commit a defalcation while acting in his fiduciary capacity. In Bullock, the Supreme Court articulated a uniform federal defalcation standard:
Bullock, 133 S.Ct. at 1759-1760. The Bullock standard is similar to that previously applied by the Second Circuit, which had defined defalcation as "conscious misbehavior or extreme recklessness." In re Hyman, 502 F.3d 61, 68-69 (2d Cir.2007) ("standard does not reach fiduciaries who may have failed to account for funds or property for which they were responsible only as a consequence of negligence, inadvertence or similar conduct not shown to be sufficiently culpable."); see also Shao Ke v. Jianrong Wang, Case No. 14-3824, ___ Fed.Appx. ___, ___, 2015 WL 5805954, at *1 (2d Cir. Oct. 6, 2015) (defalcation under § 523(a)(4) requires a showing that the faithless fiduciary committed an "intentional wrong," which incorporates a standard of conscious misbehavior or extreme recklessness).
Thus, the question is whether Debtor made such use of CSI's collections as to constitute an intentional wrong or reckless conduct rising to the level of criminally wrong. As noted above, this Court is not faced with a fiduciary absconding with or misusing funds that had been contributed by CSI's employees to be paid on to the Benefit Funds, or funds which were deducted from the employees' paychecks to be paid on to the Benefit Funds. Here, the sole issue is Debtor's alleged failure to cause CSI to make contributions to the Benefit Funds from CSI's own general assets.
Plaintiffs have essentially argued that every dollar collected or received by CSI were trust funds which were required to be paid on to the Benefit Funds for any unpaid contributions owing by CSI, including both contributions which were due and owing at the time CSI collected any money and contributions that were not yet due when CSI collected any money. Plaintiffs rely on the CBA language as follows:
(emphasis added).
This Court disagrees. First, Plaintiffs have not cited to any section of ERISA which makes general corporate funds of CSI trust funds in any manner similar to funds that have been paid into an ERISA plan or which have been withheld from employee paychecks and earmarked for ERISA plan contributions. Second, Plaintiffs' arguments would essentially elevate the general unsecured right of the Benefits Funds over the rights of secured creditors who have liens against accounts receivables and the cash proceeds thereof. Alternatively, as Judge Kornreich feared in his Fahey dissent, Plaintiffs would put a control person such as Debtor, who was running a struggling company, in the hapless situation of either paying a secured creditor from its receivables and incurring fiduciary personal liability for unpaid contributions, or avoiding ERISA personal liability by misusing cash collateral, or alternatively, having to choose avoiding personal liability over paying vendors necessary to the continued success of the company. Forcing control persons of insolvent entities to choose between pension fund obligations and their duties to general creditors opens a Pandora's Box cluttered with fiduciary duties. Thus, while Debtor was a fiduciary, he did not commit a defalcation under the Bullock standard.
Plaintiffs go to great lengths in their papers to paint a picture of Debtor using CSI's assets for his own personal use, such as by paying the mortgage on his home, and therefore, committing a defalcation; however, Plaintiffs admitted at the Hearing that CSI assets, in fact, had not been used to pay Defendant's personal expenses or his home mortgage. In fact, the picture here is of a Debtor trying to keep his struggling company afloat. Prior to the Termination, CSI paid at least $455,165.00 of the contributions owed under the 2010 Judgment, and Kern personally paid at least $150,000.00 of the contributions owed to the Pension Funds under the 2012 Judgment. While Plaintiffs bemoan the fact the during 2009 through 2011 Kern received approximately $450,000 of salary from CSI and Sharon Kern received approximately $150,000 of salary from CSI, they belittle the fact that, in order to keep CSI operating, the Kerns personally contributed $577,392.00 of their funds into CSI's operations from September 2010 through February 2012, the vast bulk of which were contributed prior to the Termination. Moreover, the Kerns paid direct obligations of CSI's totaling $45,446.49 during the end of 2011 and beginning of 2012; the bulk of these, too, were paid prior to the Termination. Thus, in the aggregate, during the last few years that CSI struggled, the Kerns personally contributed to the company at least as much as they took out in compensation.
Thus, the record before this Court does not demonstrate self-dealing by Debtor, nor bad faith, moral turpitude, or other immoral conduct. Further, Plaintiffs have fallen far short of demonstrating the intentional conduct that the fiduciary knows is improper, or reckless conduct that criminal law often treats as equivalent to intentional conduct, as required under Bullock. Thus, no defalcation was committed by Debtor.
This Court has conducted a "statutory, not a policy, analysis" and therefore, will not address the policy arguments asserted by the parties. See In re Zair, 535 B.R. 15, 18 (Bankr.E.D.N.Y.2015) (court explained that it was conducting a statutory, not policy, analysis).
This Court concludes that Plaintiffs have not established their entitlement to summary judgment, and Debtor has established his entitlement to summary judgment. As such, all claims in the Amended Complaint should be dismissed as a matter of law. Debtor is also entitled to his costs under Rule 7054.
Counsel for Debtor is directed to submit a judgment in conformity herewith within
