Eavenson v. RameyEavenson v. Ramey
ORDER
The dispute in the present appeal from the United States Bankruptcy Court centers around the effect of this court’s decision in Ramey v. Empire Manufacturing Co., No. 2:95-CV-146-WCO (N.D.Ga. June 18, 1997). The bankruptcy court concluded that the former judgment, a suit under the Employee Retirement Income Security Act (“ERISA judgment”), was entitled to preclusive effect in the present action. The bankruptcy court ruled that based on the findings in the ERISA judgment, the appellant-debtor’s debt was non-discharge-able under 11 U.S.C. § 523(a)(4). The debtor appeals the bankruptcy court’s application of issue preclusion.
BACKGROUND
I. ERISA Judgment
A bench trial was held before this court on March 17, 1997, and the court found as follows in its findings of fact.
See Ramey v. Empire Manufacturing Co.,
No. 2:95-CV-146-WCO (N.D.Ga. June 18, 1997). Appellees-plaintiffs were employees of
The court concluded that appellant was a “fiduciary” as defined under ERISA pursuant to the terms of the plan, citing
Varity Corp. v. Howe,
II. Bankruptcy Proceeding
Appellant filed for bankruptcy on March 19, 1998. The appellees filed the present complaint to determine dischargeability on June 23, 1998. They sought to except their ERISA judgment from discharge under 11 U.S.C. § 523(a)(4) (for fraud or defalcation while acting in a fiduciary capacity) and 11 U.S.C. § 523(a)(2)(A) (for false pretenses, false representations, or actual fraud). Relying on
In re Eisenberg,
DISCUSSION
I. Standard of Review
The district court functions as an appellate court in reviewing the bankruptcy court’s decision. As this is an appeal solely from the bankruptcy court’s conclusions of law, the court makes a
de novo
review of the bankruptcy court’s decision.
See Schlein v. Mills,
II. Analysis
It is well-established that collateral estoppel is applicable in a discharge-ability exception proceeding in bankruptcy court.
See Grogan v. Garner,
A central purpose of the Bankruptcy Code is to provide an opportunity for certain insolvent debtors to discharge their debts and enjoy a fresh start.
See Grogan v. Garner,
For a debt to be non-dischargeable under 11 U.S.C. § 523(a)(4), the bankruptcy court must find that the debtor acted as a fiduciary and that in the course of performing his fiduciary duties, he committed an act of fraud or defalcation. The term fiduciary is not to be construed expansively but is to be limited to relationships constituting “technical trusts.”
See Quaif v. Johnson,
First, a technical trust relationship must exist prior to the act creating the debt and without reference to that act.
See In re Cross,
In
Quaif v. Johnson,
It is not entirely clear whether a separately identifiable res is required for a statutory trust. Although
Quaif
addressed this issue, it did not definitively articulate whether it is an essential element.
Does ERISA create fiduciary duties sufficient to create a “technical trust?” The lower courts are split.
Compare In re Coleman,
ERISA statutorily satisfies the elements of a technical trust under § 523(a)(4). It identifies the fiduciary and his or her specific fiduciary duties. 29 U.S.C. § 1002 provides that
a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets ... or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.
ERISA requires such a fiduciary to,
inter alia,
provide for continuation coverage, provide a detailed plan description to all employee-beneficiaries, notify each employee-beneficiary of any material changes, and act with the care, skill, prudence, and diligence of a prudent man acting in a like capacity.
See
29 U.S.C. §§ 1022, 1024(b)(1), 1104(a)(1)(B), 1161(a).
6
These fiduciary duties draw much of their content from the common law of trusts, the law which governed most benefit plans before ERISA’s enactment.
See Varity Corp. v. Howe,
Appellant takes issue with the fact that he was not required to keep the employees’ withheld wages in a separate fund. He argues, therefore, that no trust res was established and he is not a fiduciary under § 523(a)(4). This argument is unavailing. As the Eleventh Circuit stated, “the court does not believe that a separation of ... funds into distinct bank accounts is an essential requirement of a trust.”
Quaif v. Johnson,
Thus, the court concludes that ERISA sufficiently creates fiduciary duties such that the elements of a technical trust are satisfied. An ERISA fiduciary, under the obligation to satisfy his corresponding fiduciary duties, therefore acts in a “fiduciary capacity” under § 523(a)(4). Consequently, the final judgment concluding that appellant was a fiduciary under ERISA is entitled to preclusive effect that he was acting in a fiduciary capacity under § 523(a)(4).
Finding that appellant was acting in a fiduciary capacity, the court now turns to the question of whether he committed an “act of defalcation” by violating his ERISA fiduciary duties. Noting the uncertainty surrounding the meaning of defalcation, the Eleventh Circuit accredited Judge Learned Hand’s analysis of the term in
Central Hanover Bank & Trust Co. v. Herbst,
Judge Hand concluded that while a purely innocent mistake by the fiduciary may be dischargeable, a ‘defalcation’ for purposes of this statute does not have torise to the level of ‘fraud,’ ‘embezzlement,’ or even ‘misappropriation.’ Some cases have read the term even more broadly, stating that even a purely innocent party can be deemed to have committed a defalcation for purposes of § 523(a)(4).
Id. (citations omitted). The court went on to implicitly hold that although an act of defalcation does not have to rise to the level of fraud, it must be intentional; negligence or innocent mistake may not be enough. Id. (“The record ... indicates that [the alleged act of defalcation] ... was far more than an innocent mistake or even negligence. [The debtor] does not seriously contest that the transfer was intentional. Therefore, the court must conclude that the failure to remit premiums ... constituted a defalcation within the meaning of § 523(a)(4).”).
The question then becomes whether appellant’s breach of his ERISA duties, as found in the court’s ERISA judgment, constitutes defalcation. If it does, then it is entitled to preclusive effect. In finding that appellant violated his ERISA fiduciary duties, the court found the following facts crucial to its decision:
1) ... defendant Eavenson did not inform the employees that the Plan was in a precarious financial state and, in fact, was essentially bankrupt in late 1994;
2) ... defendant Eavenson assured plaintiffs that the medical bills would be paid and still deducted the employees’ contribution from their weekly paychecks; and
3) ... defendant Eavenson did not separate employee contributions, deducted from their paychecks expressly for the Plan, from its general funds used towards paying operating expenses.
Ramey v. Empire Manufacturing Co., No. 2:95-CV-146-W CO at 11-12 (N.D.Ga. June 18, 1997). The court also found that although appellant never affirmatively misled his employees, his silence achieved the same result. Id. at 12.
Appellant claims that his conduct was “innocent” and involved no wrongdoing. Br. Appellant, p. 13-14. Instead, he maintains that he was an “innocent debtor doing the best he could” who at the end of the day could not pay all of his corporation’s bills, including medical claims. Id. at 14. The court is not persuaded. Simply failing to pay medical claims was not how. appellant violated his fiduciary duties. Appellant failed to inform employees of his knowledge regarding Empire’s perilous financial condition and the fact that the plan was essentially bankrupt; he failed to inform the employees of his knowledge that their medical claims were not being paid; and he continued to permit the taking of deductions from employees’ wages in spite of his aforementioned knowledge. Ramey v. Empire Manufacturing Co., No. 2:95-CV-146-WCO at 12 (N.D.Ga. June 18, 1997). His conduct violated his fiduciary duties under ERISA and was carried out with knowledge and intent. Hence, the court finds that appellant’s conduct amounted to an act of defalcation. The bankruptcy court did not err in concluding that the court’s findings in the ERISA judgment were entitled to preclusive effect in this regard.
The court notes appellant’s argument that even if he was acting in a fiduciary capacity and even if he did commit an act of defalcation, the debt is nonetheless dis-chargeable because it did not arise out of nor was it the result of the act of defalcation. Relying on
Local Union 2134, United Mine Workers of America v. Powhatan Fuel, Inc.,
Lastly, appellant argues that even if the court finds that he committed an act of defalcation while acting in a fiduciary capacity and the debt arose from that defalcation, the bankruptcy court has the obligation to hear evidence and make a factual determination regarding the specific date after which appellant violated his fiduciary duties and the portion of claims which arose after that date. Br. Appellant, p. 15. He argues that many medical claims arose months before it was known that Empire may not have been able to pay the claims. Id. For example, “if the [appellant] became aware on January 1, 1995 that Empire could not pay claims without a merger, he was under a duty to disclose this fact at that point. If $75,-000.00 of the medical claims arose after that date, the breach of fiduciary duty may have caused that amount of loss to the [appellees]. However, the $42,577.01 that already existed prior to January 1, 1995 did not arise as the result of a defalcation while acting in a fiduciary capacity and that amount of the obligation, at a minimum, is dischargeable.” Id at 15-16. Despite appellant’s engaging argument, he is essentially asking to relitigate facts which have already been decided in the final ERISA judgment, precisely what issue preclusion prohibits. It has already been determined that appellant is liable for unpaid claims totaling $117,577.01 as a result of violating his fiduciary duties under ERISA. Thus, this amount arose as a result of his defalcation. There is no justification to relitigate that fact.
CONCLUSION
In summary, ERISA establishes the elements of a technical trust in statutory form, and thus one acting as a fiduciary under ERISA is also acting in a fiduciary capacity under 11 U.S.C. § 523(a)(4). Additionally, the facts found in the ERISA judgment which constituted a violation of appellant’s ERISA fiduciary duties also constituted defalcation under § 523(a)(4) as a matter of law. Finally, appellant’s debt arose as a result of the defalcation committed while acting in his fiduciary capacity. Accordingly, the bankruptcy judge did not err in applying the doctrine of issue preclusion and finding that the elements of 11 U.S.C. § 523(a)(4) were met, thereby ruling that the ERISA judgment was non-dischargeable. 7
Notes
. As the case was disposed of on those grounds, the bankruptcy court never decided whether the debt was nondischargeable on the grounds of fraud under 11 U.S.C. § 523(a)(4) or false pretenses, false representations, or actual fraud under 11 U.S.C. § 523(a)(2)(A).
. In
Bonner v. City of Prichard,
. The issue of appellant's status as a fiduciary and the issue of whether he violated his fiduciary duties were actually litigated in the ERISA action, there was a decision on the issues, and that decision was critical and necessary to the judgment. Indeed, those issues were the reason for the ERISA judgment. If the issues had been decided differently, the judgment would have gone for appellant instead of appellees.
As for the burden of persuasion, it is the same in dischargeability proceedings as it is in ERISA proceedings.
Compare Grogan v. Garner,
. The Supreme Court has not spoken on the issue of technical trusts since this. 1934 decision.
. In
Stein v. Reynolds Securities, Inc.,
. Appellant Eavenson admitted he was “functional fiduciary” at the ERISA bench trial and that his duties included deciding if and when to pay medical providers for duly administered claims of employees. See Ramey v. Empire Manufacturing Co., No. 2:95-CV-146-WCO at 9 (N.D.Ga. June 18, 1997).
. Both parties and the bankruptcy judge referred to the ERISA judgment generally. No distinction has been made between the primary judgment and attorney’s fees. Appel-lees’ initial complaint in the bankruptcy court requested that the ERISA judgment be determined as non-dischargeable and outlined the judgment as follows: "Q]udgment ... in the amount of $117,577.01, plus awarded attorneys' fees in the amount of $27,170.50. Judgment was thereupon entered, plus interest at the legal rate of 5.88% annum until paid ...." Compl. Determine Dischargeability Debt, ¶¶ 12-14. The bankruptcy court “ORDERED that the obligation in dispute herein is nondischargeable pursuant to 11 U.S.C. § 523(a)(4) and judgment on Plaintiffs' complaint shall be entered in favor of Plaintiffs and against Defendant-Debtor.”
In re Eaveson,
No. G98-20615-REB, Adversary Proceeding No. 98-2033 (Bankr.N.D.Ga. April 15, 1999). The court interprets this to mean that the entire amount of the judgment, $144,-747.51 plus interest until paid, was found to be non-dischargeable. Appellant's brief makes reference to the debt in question as "the $117,577.01 debt” and then as the "$117,577.01 in unpaid medical claims Br. Appellant, p. 8 & 16. The court finds that this does not sufficiently raise the issue that attorney's fees should be dischargeable.
See
Fed. R. App. P. 28(a). However, the court recognizes that the law is unsettled regarding the parameters of when attorney’s fees are dischargeable.
See Klingman v. Levinson,