898 F.3d 834
8th Cir.2018Background
- Michael Harris was CEO of Faribault Woolen Mills; the company withheld employee health-insurance premiums from paychecks but was required to remit them to HealthPartners monthly.
- Between Jan–Mar 2009, Faribault withheld $55,040.61 in premiums that were not remitted; HealthPartners canceled the plan and employees lost coverage; Harris had signatory authority and exercised control over accounts.
- In late March 2009 Harris directed or allowed transfers from the general account (which contained withheld premiums) to corporate creditors and to pay personal obligations, including a home-equity line payment.
- The DOL sued in district court under ERISA; the district court found Harris an ERISA fiduciary, determined he breached his duty of loyalty by diverting withheld premiums, and entered judgment for $55,040.61 (plus interest).
- Harris filed Chapter 7 bankruptcy; the DOL sought nondischargeability of the ERISA judgment under 11 U.S.C. § 523(a)(4) (defalcation while acting in a fiduciary capacity). The bankruptcy court and the BAP granted summary judgment for the DOL; Harris appealed to the Eighth Circuit.
Issues
| Issue | Plaintiff's Argument (DOL) | Defendant's Argument (Harris) | Held |
|---|---|---|---|
| Whether funds withheld from wages created a trust res making Harris a § 523(a)(4) fiduciary | Withheld employee contributions became plan assets and Harris exercised authority/control over them, creating a preexisting fiduciary duty | The ERISA fiduciary finding does not automatically satisfy § 523(a)(4); Harris claims he did not personally have the requisite preexisting trust obligation and routine CFO activity shows he lacked control | Court held withheld contributions were plan assets, Harris exercised control before diversion, and thus had fiduciary obligations under § 523(a)(4) |
| Whether Harris’s conduct constituted "defalcation" (required mental state) | Harris knowingly or with gross recklessness diverted plan assets (willful blindness to substantial, unjustifiable risk), prioritizing personal/corporate payments over withheld premiums | Harris acted to save the company (good-faith, desperate efforts); borrowed personally, reduced his own compensation, believed financing was imminent — lacks intent/gross recklessness for defalcation | Court held undisputed facts show conscious disregard/willful blindness and grossly reckless conduct amounting to defalcation under Bullock; debt nondischargeable |
Key Cases Cited
- Bullock v. BankChampaign N.A., 569 U.S. 267 (2013) (defalcation requires knowledge or gross recklessness; willful blindness to substantial unjustifiable risk qualifies)
- Hunter v. Philpott, 373 F.3d 873 (8th Cir. 2004) (§ 523(a)(4) requires an express trust; must examine whether debtor was legally obligated to hold the specific property)
- In re Patch, 526 F.3d 1176 (8th Cir. 2008) (standard of review for BAP summary judgment affirmance)
- In re Thompson, 686 F.3d 940 (8th Cir. 2012) (narrow construction of § 523 exceptions; fiduciary question is federal law)
- Davis v. Aetna Acceptance Co., 293 U.S. 328 (1934) (trust relationship must preexist the wrong creating the debt)
- In re Harris, 561 B.R. 726 (B.A.P. 8th Cir. 2017) (BAP opinion affirming bankruptcy court that withheld wages were trust res and Harris committed defalcation)