Fahey v. FaheyFahey v. Fahey
Lead Opinion
Chаrles Raso (“Raso”) appeals from a bankruptcy court order granting summary judgment in favor of the debtor, James M. Fahey, Jr. (“Fahey”), on Count II of Raso’s § 523(a)(4)
BACKGROUND
Fahey was formerly the president, treasurer, and sole shareholder of Zani Tile, Inc. (“Zani”), a business located in Water-town, Massachusetts. Raso was the president and secretary-treasurer of a labor organization known as Bricklаyers and Allied Craftsmen Local Union No. 3 Massachusetts, Maine, New Hampshire, Rhode Island (“BAC Local 3”). He was also the trustee and treasurer of the Massachusetts Bricklayers and Masons Health and Welfare, Pension, and Annuity Funds (collectively, the “Funds”), which were multi-employer employee benefit plans. Each fund was a trust established pursuant to an Agreement and Declaration of Trust (“Trust Agreement”) for the purpose of receiving contributions from participating employers in order to provide health and welfare, pension, and annuity benefits to eligible employees pursuant to collective bargaining agreements (“CBA’s”) between such employers and BAC Local 3. Each Trust Agreement provided, inter alia, that
The term “assets” shall mean all property held or owned by the Fund without regard to its quality or character, including any assets under the control or direction of Investment Managers that may be еmployed by the Fund. In addition, all contributions shall be considered and defined as plan assets including contributions that are properly due and owing but not yet paid to the Fund by Contributing Employers.
(emphasis added).
In January 2011, Fahey filed a voluntary petition for chapter 7 relief. On Schedule F, he indicated that Raso, as Trustee of BAC Local 3, held an approximate
In Count II, Raso alleged that the CBA’s also required Zani to make pension, health, and annuity contributions to the Funds on behalf of certain employees. According to Raso, Zani failed to make the required contributions to the Funds for the period of March 2009 to April 2010. Raso further alleged in Count II that as a “ ‘fiduciary
Fahey filed an answer to the complaint, in which he: (1) denied that Raso held a claim against him, individually; (2) admitted that he exercised management control of Zani, but denied that he was a fiduciary of Zani or had any fiduciary duty to Raso; (3) denied that Raso had standing to raise any potential breach of fiduciary duty; and (4) denied that he breached his duty when he failed to remit the subject contributions.
Thereafter, on January 23, 2012, Raso filed a motion for summary judgment against Fahey on both counts of the complaint, arguing that the debt for unpaid contributions satisfied the elements required for nondischargeability under § 523(a)(4). He contended that: (1) the nonpayment of union dues and employee contributions constituted a defalcation under § 523; and (2) at the time of the defalcation, Fahey was a fiduciary within the meaning of ERISA, 29 U.S.C. § 1002(21)(A). In his accompanying statement of undisputed facts, Raso added, inter alia, that: (1) Zani made payments through August 2010 on a mortgage encumbering Fahey’s home, notwithstanding Fahey’s declaration in his Statement of Financial Affairs that he received no income from Zani in 2010; and (2) Zani made weekly payments of $1,463.33 to Fa-hey from January 7, 2010 to April 26, 2010, as well as payments of $6,000.00 and $1,000.00 on June 21, 2010, and June 26, 2010, respectively, notwithstanding Fa-
Attached to the affidavit Raso’s counsel filed in support of summary judgment was the partial transcript of the November 2011 deposition of Fahey in which Fahey gave the following testimony regarding the evolution of his relationship to Zani: that from 1972 to 1995, he worked as a tile setter for Zani; that from 1995 until 2010, he was the president of Zani Tile; that he, his father, and another individual purchased Zani Tile; that in 2006, he became the sole shareholder of the business and acted in that capacity until August 2010, when Zani ceased operations. Fahey described himself as the “sole decision-maker of Zani,” responsible for determining “who should be paid and how much.” He admitted that it was his duty to ensure that the deductions for union dues were made, to decide whether to pay the federal taxes withheld from employees’ wages, and to determine whether to pay the contributions which were due to the Funds. Additionally, according to Fahey’s testimony, he oversaw the day-to-day operations of the business, including project management, purchasing, and bookkeeping. He further acknowledged that Zani made monthly payments through August 2010 to Citizens Bank on account of a $185,535.00 loan to Zani, which he guaranteed and secured with a mortgage on his properties located in Milton and East Dennis, Massachusetts.
Fahey filed a response to the summary judgment motion, in which he conceded that all unpaid deductions (amounting to $19,098.38) were nondischargeable and consented to the entry of summary judgment in Raso’s favor on Count I. He opposed the entry of summary judgment on Count II, however, arguing that the failure to pay contributions (totaling $202,175.46) did not constitute fraud or defalcation while acting in a fiduciary capacity. Maintaining that “defalcation” is “a failure to produce funds entrusted ... to a fiduciary,” Fahey claimed that Raso failed to demonstrate that funds were entrusted to him. Moreover, Fahey claimed: 1) the failure to pay contributions was a breach of contract by Zani, for which he was not personally liable; and 2) such breaches are dischargeable in bankruptcy. Challenging the cases cited by Raso as inapposite and relying heavily on Rutanen v. Baylis (In re Baylis),
On May 14, 2012,
[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....
Id at 656-57 (quoting 29 U.S.C. § 1002(21)(A)(i)) (alteration in original). While the court stated that there was “no question that [Fahey] had physical control over Zani’s assets, and by extension, the unpaid [contributions,” it concluded “that control was not discretionary in nature,” as required by the foregoing ERISA definition. Id at 657. The court reasoned:
The Debtor had a contractual obligation pursuant to the CBA to pay Contributions to the Funds, and it is the Plaintiff, not the Debtor, who has discretionary control over the “contractual right to collect unpaid contributions. Whether to enforce [its] contractual rights is entirely up to the [Plaintiff]; the [Debtor], meanwhile, [has] no say over whether this right will be enforced or not.”
Id (quoting Navarre v. Luna (In re Luna),
The court adopted the reasoning of Luna, supra, and rejected as “incorrectly decided” the cases relied upon by Raso, namely, NYSA-ILA Med. & Clinical Servs. Fund v. Catucci,
On appeal, Raso argues that the bankruptcy court erred when it determined that Fahey was not an ERISA fiduciаry. He maintains that contrary to the bankruptcy court’s opinion, “a person need only have actual control over the disposition of
Conversely, Fahey argues that the bankruptcy court correctly found that he was not a fiduciary because he did not, and could not, exercise any control regarding the collection of unpaid contributions. He also contends that Raso failed to establish the element of defalcation, which requires a showing that funds were entrusted to Fahey. Accordingly, Fahey asks the Panel to affirm the Order with respect to Count II.
JURISDICTION
We are “ ‘duty-bound’ ” to determine whether we have jurisdiction before proceeding to the merits, even if not raised by the litigants. Boylan v. George E. Bumpus, Jr. Constr. Co., Inc. (In re George E. Bumpus, Jr. Constr. Co., Inc.),
STANDARD OF REVIEW
A bankruptcy court’s findings of fact are reviewed for clear error and its conclusions of law are reviewed de novo. See Lessard v. Wilton-Lyndeborough Coop. School Dist.,
DISCUSSION
I. The Summary Judgment Standard
“In bankruptcy, summary judgment is governed in the first instance by Bankruptcy Rule 7056.” Desmond v. Varrasso (In re Varrasso),
There are no relevant and material facts in dispute on appeal before the Panel. The issue on appeal is whether the bankruptcy court erred, as a matter оf law, in concluding that Fahey was not an ERISA fiduciary and that there was no other basis for a finding of fiduciary capacity under § 523(a)(4). The Panel reviews the bankruptcy court’s decision de novo.
II. Nondischargeability Under § 523(a)(4)
Section 523(a)(4) provides that a discharge in a bankruptcy proceeding “does not discharge an individual debtor from any debt ... for fraud or defalcation while acting in a fiduciary capacity....” 11 U.S.C. § 523(a)(4). “This bar to discharge reaches debts incurred through abuses of fiduciary positions ... [and] involving] debts arising from the debtor’s acquisition or use of property that is not the debtor’s.” FNFS, Ltd. v. Harwood (In re Harwood),
A. Standards for Express or Technical Trust
“The usual elements of an express trust have traditionally included an explicit declaration of trust, a clearly defined trust res, and an intent to create a trust relationship.” Gehlhausen v. Olinger
B. Standards Governing the Fiduciary Relationship Element
The fiduciary relationship necessary for a denial of discharge under § 523(a)(4) is determined by federal law. In re D’Abrosca,
C. Standards Governing the Defalcation Element
In Baylis, supra, the First Circuit instructed that “[i]n evaluating whether there is a defalcation of a fiduciary duty, there must be reference to the duty involved.”
III. The Standards Applied
Our analysis is necessarily three-fold. We must determine whether the record supports a conclusion that there was an express or technical trust; that Fahey acted in a fiduciary capacity with respect to the trust; and that the transaction or transactions in question constituted a “defalcation” within the meaning of bankruptcy law. In re Duncan,
A. Express or Technical Trust
Raso contends that Fahey was a fiduciary by virtue of a technical trust created by ERISA.
ERISA § 403(a) requires that “all assets of an employee benefit plan shall be held in trust by one or more trustees,” and the parties have stipulated that the Funds qualify as employee benefit plans under ERISA. The Funds entrusted plan assets, in the form of Contributions and Deductions, to trustees of the Funds, and therefore the first element of a statutory trust has been met. Further, ERISA delineates who qualifies as a fiduciary and assigns those fiduciaries various duties. For example, ERISA requires fiduciaries to:
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 ... [T]hese duties attach to the fiduciary at the creation of an ERISA plan. Thus, the requirement that a ‘technical trust’ arise prior to and without regard to the breach ... is satisfied.
Here, the ERISA plan, in the form of the Funds, predated the Debtor’s failure to pay Contributions. Accordingly, the trust was in place when the alleged defalcation occurred. The second and third elements of a statutory trust are therefore satisfied, and the Funds constitute technical trusts.
In re Fahey,
Based on the foregoing analysis, we conclude that the bankruptcy court correctly
B. Acting in a Fiduciary Capacity With Respect to the Funds
The meaning of fiduciary, as stated supra, is a matter of federal law. The definition of fiduciary set forth in ERISA, 29 U.S.C. § 1002(21)(A), is premised “not in terms of formal trusteeship, but in junctional terms of control and authority over the plan.” Mertens v. Hewitt Assocs.,
Raso argues only that Fahey was a fiduciary within the meaning of ERISA, 29 U.S.C. § 1002(21)(A)(i).
1. Any Authority or Control Regarding Management or Disposition of Plan Assets
(a) Plan Assets
In order to determine if Fahey had any control or authority over plan assets we must find, as a threshold matter, that the employer contributions are considered as such. In re Parker,
In contrast, in Luna, the Tenth Circuit found that the relevant trust documents and collective bargaining agreement were “at best ambiguous regarding the point when unpaid contributions became plan assets.”
Without any guidance from the CBA and other trust documents, the court turned to the common law of property to decide whether the unpaid contributions at issue were plan assets. The court ultimately defined the plan assets as the Trustees’ contractual right to collect unpaid contributions, rather than the unpaid contributions themselves. Because the contractual right to collect unpaid contributions belonged solely to the Trustees, the employers “exercised no control over how the Trustees manage or dispose of that asset.” The court’s simple conclusion from this was that, with no control over the Trustees’ contractual right, the employers could not be considered a fiduciary of the plan’s assets.
Nettleton,
In the instant case, a review of the relevant Trust Agreements reveals no ambiguity in the Luna sense. Instead, the language defining the trust assets is comparable to the unambiguous definitional language of the trust agreement in Nettleton. Each Trust Agreement specifically provides in Section 1.15:
The term assets shall mean all property held or owned by the Fund without regard to its quality or character, including any assets under the control or direction of Investment Managers that may be employed by the Fund. In addition, all contributions shall be considered and defined as plan assets including contributions that are properly due and owing but not yet paid to the Fund by Contributing Employers.
(emphasis added).
In light of the foregoing, we conclude that the bankruptcy court correctly determined that “the delinquent [c]ontributions were assets of the Funds, despite the fact that they remained in Zani’s possession, and the first prong of ERISA’s definition of fiduciary is satisfied.” In re Fahey,
(b) Authority or Control
The bankruptcy court’s fiduciary capacity analysis turns on its application of ERISA’s requirement of a certain type of control with respect to the plan assets pursuant to 29 U.S.C. § 1002(21)(A)(i). Specifically, the court stated: “The second prong of ERISA’s definition of fiduciary requires a showing that [Fahey] exercised ‘discretionary authority or discretionary control respecting management ... or disposition of [the plan’s] assets.’ ” In re Fahey,
As the Second Circuit has stated, this provision of ERISA requires a showing of “actual control over the disposition of plan assets.” Blatt v. Marshall and Lassman,
contractual obligation pursuant to the CBA to pay Contributions to the Funds, and it [was Raso], not [Fahey] who [had] discretionary control over the “contractual right to collect unpaid contributions.” ... Although [Fahey] certainly had the option to breach [his] contract, and in fact did, “an employer cannot become an ERISA fiduciary merely because it breaches its contractual obligations to a fund.”
Id. at 657-58 (quoting Luna,
We disagree with the bankruptcy court’s conclusion for two reasons. First, its reliance on Luna is misplaced because, in that case, the court’s finding that fiduciary capacity was absent was premised on the assumption that the plan asset was the right to collect unpaid contributions, not the unpaid contribution itself. In the case before us, however, the bankruptcy сourt acknowledged that the unpaid contributions were assets of the Funds. Thus, its focus properly should have been whether Fahey exercised the requisite control over the unpaid contributions rather than the right to collect those contributions. Secondly, a review of the record reveals that Fahey’s responsibility and control were much wider than the bankruptcy court’s decision implies. To suggest that Fahey merely had a contractual obligation to pay — or not to pay — plan contributions marginalizes Fahey’s role and responsibility in relation to the Funds and their assets. This view appears to overlook that Fahey, as the president and sole owner of a corporation whose debt to an ERISA plan was a plan asset, had assumed unfettered authority in all matters directly and indirectly related to Zani’s payment of contributions to the Funds. This authority, by his own admission, included responsibility for running Zani’s day-to-day operations, and extended to all of Zani’s decisions, including
Under similar circumstances, courts have found a level of actual control relating to management or disposition of plan assets which was sufficient to qualify for ERISA fiduciary status. See, e.g., LoPresti v. Terwilliger,
The foregoing decisions are persuasive, insofar as they are consistent with the Supreme Court’s recognition that ERISA defines “fiduciary” “in functional terms of control and authority over the plаn.” Mertens v. Hewitt Assocs.,
The conclusion that Fаhey was an ERISA fiduciary is consistent with the “core purpose of ERISA, which is to create a system whereby accountable fiduciaries are motivated by their accountability to protect the interests of participants in ERISA plans.” Herman v. NationsBank Trust Co.,
That is what the corporation and its controlling persons bargained for ...when they agreed that unpaid contributions be deemed Fund assets. A ruling otherwise would improperly rewrite a collective bargaining agreement in a way that deprives one party, the Fund, of a useful debt collection procedure that the other party — the employer and its privies, agents, and controlling persons— freely agreed upon in a bargaining process that balanced both sides’ benefits and detriments.
Catucci,
The Panel concludes that Fahey is a fiduciary in relation to the Funds within the meaning of 29 U.S.C. § 1002(21)(A)(i), responsible and accountable for the Funds’ assets.
2. Does ERISA Fiduciary Status Satisfy § 523(a)(4)’s Fiduciary Capacity Requirement?
The First Circuit has not addressed whether ERISA fiduciary status will satisfy § 523(a)(4)’s fiduciary capacity requirement. Appellate courts are “split on the question of whether acting in a fiduciary capacity under ERISA is coextensive with acting in a fiduciary capacity under § 523(a)(4).” In re Mayo,
The trust res is identified by the creation of the plan itself. 29 U.S.C. § 1102. ERISA also defines the fiduciary’s fund management duties. See, e.g., 29 U.S.C. §§ 1103-1104. These duties necessarily arise upon creation of an ERISA plan and predate the creation of any debt to the plan participant creditor.... ERISA imposes obligations on the fiduciary prior to the alleged wrongdoing. Thus, ERISA satisfies the traditional requirements for a statutory fiduciary to qualify as a fiduciary under § 523(a)(4). Morgan v. Musgrove (In re Musgrove),187 B.R. 808 , 814 (Bankr.N.D.Ga.1995).
Id.
On the other hand, the Sixth and Eighth Circuits have held that being an ERISA fiduciary is not sufficient, in and of itself, to satisfy the fiduciary capacity element of § 523(a)(4). See, e.g., Hunter v. Philpott,
Numerous bankruptcy courts side with the Ninth Circuit and find it “reasonable and appropriate to look to ERISA’s definition of a fiduciary in order to assess whether the requirement of fiduciary capacity has been met” under § 523(a)(4). In re Duncan,
The reasoning of the Ninth Circuit in Hemmeter, supra, and the numerous bankruptcy court decisions similarly concluding that an ERISA fiduciary will satisfy the “fiduciary capacity” requirement of § 523(a)(4), appears sound. Indeed, as one bankruptcy court noted, “it is routine to give meaning to Bankruptcy Code terms by reference to non-bankruptcy law.” In re Duncan,
Moreover, even if an ERISA fiduciary does not per se satisfy the § 523(a)(4) requirement for “fiduciary capacity,” an analysis of Fahey’s control and authority over the plan in functional terms nonetheless yields the conclusion that he acted as a fiduciary of a technical trust imposed by common law. See In re Mayo,
Certain inescapable conclusions follow from an examination of the critical issue of Fahеy’s control. Because Fahey assumed unfettered control over the unpaid contributions (which constitute plan
The remaining step in the three-fold analysis is whether the nonpayment of contributions constituted a defalcation within the meaning of § 523(a)(4).
C. Defalcation
The bankruptcy court did not reach the question of whether there was a defalcation. Instead, it ruled:
While the parties focused on whether the debtor had, in fact, committed a defalcation within the meaning of [] § 523(a)(4), they incorrectly assumed that he was a fiduciary. I have held that he was not. As a result, [Raso] cannot prevail on the merits of this adversary proceeding....
In re Fahey,
CONCLUSION
In- view of the foregoing, we conclude that the bankruptcy court erred in determining that Raso failed to demonstrate that Fahey was acting in a fiduciary capacity, either as an ERISA fiduciary or as a fiduciary of a common law, technical trust. Accordingly, we REVERSE the order of the bankruptcy court and REMAND for further findings on the issue of whether the nonpayment of contributions constituted a defalcation for purposes of § 523(a)(4).
Notes
. All references to the "Code” or the "Bankruptcy Code” are to the Bankruptcy Code of 1978, as amended, 11 U.S.C. § 101, et seq. Unless otherwise indicated, all references to statutory sections are to sections of the Code. Unless expressly stated otherwise, all refer-enees to "Rule” or "Bankruptcy Rule” shall be to the Federal Rules of Bankruptcy Procedure.
. Employee Retirement Income Security Act of 1974 ("ERISA”), 29 U.S.C. § 1001, et seq.
. Raso had previously obtained a judgment against Zani and Fahey in the United States District Court for the District of Massachusetts under ERISA, on bеhalf of the Funds for damages arising from unpaid and delinquent employee benefits contributions and union dues.
. Although the bankruptcy court held a hearing on the motion for summary judgment, a transcript of the hearing was not included in the record. The docketed Proceeding Memorandum indicates that the court held a hearing and took the matter under advisement.
. The Memorandum of Decision, docket entry no. 35, replaced the prior memorandum of decision, docket entry no. 32, also entered on May 14, 2012, and subsequently withdrawn.
. Fed.R.Civ.P. 56(a) provides, in pertinent part, that "[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. The court should state on the record the reasons for granting or denying the motion.” Fed.R.Civ.P. 56(a).
. Other circuits have held that even an innocent mistake can constitute a defalcation. See, e.g., Republic of Rwanda v. Uwimana (In re Uwimana), 274 F.3d 806, 811 (4th Cir.2001) (negligence or innocent mistake resulting in misappropriation or failure to account is sufficient for defalcation under § 523(a)(4)); see also In re Sullivan,
. Raso does not assert, and the record does not support, the existence of an express trust.
. Sections 1002(2 l)(A)(ii) and (iii) are not in issue.
. Although Raso alleged generally in his complaint that Fahey was a fiduciary within the meaning of 29 U.S.C. § 1002(21)(A), he specified only that Fahey “exercised discretionary control over plan assets.” In the motion for summary judgment and on appeal, however, Raso developed the argument that Fahey also exercised actual authority regarding disposition of plan assets.
. Although Raso notes this issue in his brief, he, too, misstated the applicable ERISA provision in his complaint.
. But see Int'l Bhd. of Electrical Workers, Local Union No. 602 v. Bryant (In re Bryant),
Dissenting Opinion
Dissenting.
I respectfully disagree with both of the conclusions expressed in the majority opinion. Fahey was not a fiduciary of a technical trust arising under ERISA. For that reason, and because no express trust is implicated, he was not a fiduciary under § 523(a)(4). Thus, as determined by the bankruptcy court, Fahey was entitled to judgment on Count II of the complaint brought by Raso.
I agree with the majority that: (a) Fa-hey had exercised authority and control over all of the assets of Zani as its sole shareholder and operating officer; (b) he was responsible for fulfilling Zani’s contractual obligations to make contributions to the employee benefit funds controlled by Raso; and (c) the assets of the funds over which Raso exercised authority or control under ERISA included “contributions that are properly due and owing but not yet paid” by Zаni as the contributing employer. My point of departure is that I view the property interest of the employee benefit funds in the unpaid contributions to have been a chose in action controlled by Raso. See In re Luna, 406 F.3d at
Holding Fahey to be a fiduciary of the fund beneficiaries under an ERISA technical trust on these facts ignores the fiduciary duties he may have had to Zani’s creditors under Massachusetts law. See Seder v. Gibbs,
Unlike the Internal Revenue Code, which contains an express provision imposing breach of trust liability upon an individual who fails to pay withholding taxes, see 26 U.S.C. § 6672, ERISA contains no express provision imposing breach of trust liability upon an individual who fails to make corporate employee benefit contributions. We should not invent trust fund liability where none exists to punish a bad actor when doing so could press an honest debtor into violating a long established fiduciary duty to all general creditors. For this reason, I would affirm the bankruptcy court.