Trustees of the Sheet Metal Workers' National Pension Fund v. Kakareko (In re Kakareko)Trustees of the Sheet Metal Workers' National Pension Fund v. Kakareko (In re Kakareko)
MEMORANDUM OPINION AND ORDER DENYING PLAINTIFFS’ MOTION FOR SUMMARY JUDGMENT
I. Introduction
Plaintiffs Sheet Metal Workers’ National Pension Fund (“NPF”), National Energy Management Institute Committee for the Sheet Metal and Air Conditioning Industry (“NEMIC”), Sheet Metal Occupational Health Institute Trust (“SMO-HIT”), International Training Institute for the Sheet Metal and Air Conditioning Industry (“ITI”), and National Stabilization Agreement of the Sheet Metal Industry Fund (“SASMI”) (collectively, “plaintiffs”) bring this action asserting that the debt owed them by defendant Walter Kakareko III (“defendant”), the debtor in this chapter 7 case, is not dischargeable under 11 U.S.C. § 523(a)(4).
Now before the Court is plaintiffs’ motion for summary judgment [Adv. Dkt. No. 11]
II. Jurisdiction
The Court has jurisdiction over this matter under 28 U.S.C. § 1334(a) and (b) and the Standing Order of Reference entered by the United States District Court for the Eastern District of New York pursuant to 28 U.S.C. § 157(a), dated August 28, 1986, as amended by Order dated December 5, 2012, effective nunc pro tunc as of June 23, 2011. Consideration of the motion is a core proceeding under 28 U.S.C. § 157(b)(2) in which final orders or judgment may be entered by this Court pursuant to 28 U.S.C. § 157(b)(1).
a. Factual Background
Plaintiffs are multi-employer, employee benefit funds -within the meaning of Section 3(3) of ERISA. Pis.’ 7056-1 ¶ 1; Strang Dec!., Exhibits C, D and E; see 29 U.S.C. § 1002(3). Defendant was a principal owner and President of All Seasons, a New York corporation engaged in the installation and repair of sheet metal exteriors for commercial structures. Pis.’ 7056-1 ¶ 3; Def. Aff. ¶2; April 2014 Dep. 12:10-23. Originally a 50% shareholder when he began working at All Seasons in 1994, defendant’s ownership interest- was increased to 80% around 2009.
All Seasons entered into collective bargaining agreements under which All Seasons was obligated to make certain contributions to plaintiffs based upon the hours worked by the participants employed by All Seasons.
Contributions are considered assets of the respective Funds and title to all monies paid into and/or due and owing said Funds shall be vested in and remain exclusively in the Trustees of the respective Funds. The Employer shall have no legal or equitable right, title or interest in or to any sum paid by or due from the Employer.
Pis.’ 7056-1 ¶ 9; Strang Deck, Exhibit C, Art. XII A, Section 19.B, Art. XII B, Section 24.B; Exhibit D, Art. XII A, Section
On July 17, 2012, defendant and Henne-born signed a confessed judgment note agreeing that All Seasons, and defendant and Henneborn, individually, owed plaintiffs $229,596.27 in delinquent contributions, interest and liquidated damages. Strang Decl., Exhibit P.
b. Procedural History
Defendant filed a voluntary petition for chapter 7 relief on July 25, 2014. On November 10, 2014, NPF filed a proof of claim for $448,588.80 constituting unpaid contributions, plus interest and liquidated damages, in defendant’s bankruptcy case.
On August 15, 2014, plaintiffs filed a complaint against defendant. [Adv. Dkt. No. 1]. Plaintiffs’ claim is premised on defendant’s exercise of authority or control over the management or disposition of certain assets of plaintiffs within the meaning of Section 1002(21)(A) of ERISA. Compl. ¶¶ 28, 35. Plaintiffs alleged that plan assets include the unpaid employer contributions, and defendant determined whether All Seasons timely made contributions to plaintiffs. Compl. ¶¶ 14, 29-34. Plaintiffs contend that by exercising control over plan assets defendant is an ERISA fiduciary within the meaning of Section 3(21) of ERISA, 29 U.S.C. § 1002(21)(A), and defendant breached his fiduciary duty by permitting plan assets to be used for purposes other than payment to plaintiffs. Compl. ¶¶ 37, 38,-40.
Defendant answered the complaint. [Adv. Dkt. No. 3]. In his answer, defendant asserted that he did not exercise authority or control over the management or disposition of corporate assets, nor did he have authority and control over contributions by All Seasons to plaintiffs. Ans. ¶¶6, 11.
Plaintiffs filed the motion for summary judgment claiming that defendant’s debt for unpaid contributions was nondischargeable under § 523(a)(4) because his failure to make the required contributions to plaintiffs constituted defalcation while acting in a fiduciary capacity. Defendant filed opposition. [Adv. Dkt. No. 16]. Defendant argued that: (1) he did not have the requisite intent for defalcation as set forth by the Supreme Court in Bullock v. BankChampaign, N.A.,
IV. Legal Standard
Under Rule 56 of the Federal Rules of Civil Procedure, made applicable to this adversary proceeding by Bankruptcy Rule 7056, summary judgment may not be granted unless the movant shows, based on admissible evidence in the record placed before the court, “that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); see also Celotex Corp. v. Catrett,
The moving party bears the burden of demonstrating the absence of a genuine dispute as to any material fact. Celotex,
If the movant meets its initial burden, the nonmoving party “must come forward with ‘specific facts showing that there is a genuine issue for trial.’ ” Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp.,
On a motion for summary judgment, the court must “construe all evidence in the light most favorable to the nonmoving party, drawing all inferences and resolving all ambiguities in its favor.” Dickerson v. Na-politano,
Y. Discussion
Plaintiffs have the burden of demonstrating that their debt is nondis-chargeable by a preponderance of the evidence. Grogan v. Gamer,
a. Express or Technical Trust.
The first requirement under § 523(a)(4) is that the debt must arise from an express or technical trust. “Section 523(a)(4) applies only to express or technical trusts, not to constructive trusts, implied trusts, or trusts implied on the basis of wrongful conduct.” In re Duncan,
It is not enough that, by the very act of wrongdoing out of which the contested debt arose, the bankrupt has become chargeable as a trustee ex maleficio. He must have been a trustee before the wrong and without reference thereto ... the language would seem to apply only to a debt created by a person who was already a fiduciary when the debt was • created.
Davis v. Aetna Acceptance Co.,
An express trust “is initiated by one entity’s transfer of property to another entity coupled with a manifestation of an intention to create a trust.” In re Suarez,
Courts have held that ERISA-covered employee benefit plans are trusts for purposes of § 523(a)(4). See, e.g., Raso v. Fa-hey (In re Fahey),
The undisputed facts and documentary evidence presented by plaintiffs establish that the employer benefit plan at issue satisfies the elements of a technical trust under § 523(a)(4). Plaintiffs are employee welfare benefit plans within the meaning of ERISA. 29 U.S.C. § 1002(1).
b. Fiduciary Capacity.
Next, the Court must determine whether defendant acted with “fiduciary capacity” under § 523(a)(4). Plaintiffs argue that defendant had fiduciary capacity under § 523(a)(4) because by exercising authority or control over the management or disposition of plan assets, defendant is a fiduciary under ERISA, and an ERISA fiduciary is a fiduciary for purposes of § 523(a)(4). There is a split in authority as to whether an ERISA fiduciary per se satisfies the fiduciary standard under § 523(a)(4). See In re Kern,
Before this Court decides whether to follow the courts that have adopted the per se test, it must first determine if defendant
“[ERISA] provides that ■ not only the persons named as fiduciaries by a benefit plan but also anyone else who exercises discretionary control or authority over the plan’s management, administration, or assets is an ERISA ‘fiduciary.’” Mertens v. Hewitt Assocs.,
[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, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) or he has any discretionary authority or discretionary responsibility in the administration of such plan.
29 U.S.C. § 1002(21)(A); see also Mertens,
Plaintiffs do not allege that defendant is a named fiduciary under the plan. Plaintiffs solely argue that defendant exercised authority or control over the management or disposition of plan assets and he is, therefore, an ERISA fiduciary under sub-paragraph (i) of 29 U.S.C. § 1002(21)(A). To prevail on this argument, plaintiffs must show that (i) All Seasons’ unpaid contributions are assets of the plan and (ii) defendant exercised authority or control over the management or disposition of plan assets sufficient to make him an ERISA fiduciary. The Court begins its analysis with whether the unpaid employer contributions at issue here were plan assets. If so, then the Court must analyze whether defendant exercised authority or control with respect to the management or disposition of those plan assets sufficient to make him an ERISA fiduciary. Rahm v. Halpin (In re Halpin),
1. Whether Plan Assets Include Unpaid Employer Contributions
In Halpin, the Second Circuit found that unpaid employer contributions are not plan assets. Id. at 290-91. An employer does not become a fiduciary of plan assets simply because he has a contractual obligation to pay contributions to an employee benefit fund. Id. However, the Second Circuit did note that parties were “free to contractually provide for some other result.” Id. at 290. Therefore, the rights and obligations created by the underlying agreement determine when an
Here, the collective bargaining agreements expressly provide that “[e]m-ployer contributions are considered assets of the respective Funds and title to all monies paid into and/or due and owing said Funds shall be vested in and remain exclusively in the Trustees of the respective Funds. The Employer shall have no legal or equitable right, title, or interest in or to any sum paid by or due from the Employer.” Strang Decl,, Exhibit C, Art. XII.A, Section 19.B, Art. XII.B, Section 24.B; Exhibit D, Art. XII.A, Section 19.B, Art. XII.B Section 24.B; Exhibit E, Art. XII.A, Section 19.B, Art. XII.B, Section 24.B (emphasis added). The trust agreements define “contributions” in numerous ways: (i) NPF defines contributions as “monies required to be paid to the Fund by Employers” Id., Exhibit F, Art. I, Section 5 (emphasis added); (ii) NEMIC, SMOHIT and ITI define contributions as “the money paid or payable into the Trust Fund by an Employer, Id., Exhibits G, H, and I, Art. I, Section 6; and (iii) SASMI finds contributions to “mean the contributions made or required to be made by Employers to the Fund.” Id., Exhibit J, Art. I, Section 4 (emphasis added).
Accordingly, based upon the record placed before it, the Court finds that the language of the collective bargaining agreements and trust agreements supports plaintiffs’ theory that unpaid contributions owed by All Seasons to plaintiffs constitute plan assets under ERISA. See Hatpin,
2. Whether Defendant is an ERISA Fiduciary
To constitute an ERISA fiduciary within the meaning of 29 U.S.C. § 1002(21)(A)(i), defendant must have exercised authority or control over the management or disposition of plan assets. The provision does not specify that the control must be exclusive. Rather, ERISA requires a showing of “actual control over the disposition of plan assets.” Blatt,
Within this framework, the Court considers the evidence submitted by plaintiffs on the issue of whether defendant is an ERISA fiduciary. Defendant admitted in his deposition that he was a signatory on All Seasons’ checking accounts and determined whether or not contributions were made by All Seasons to plaintiffs. April 2014 Dep. 21:20-22:6, 22:17-23, 28:2-15. At his April 23, 2014 deposition, defendant testified as follows:
Q: During the time period that you were contributing to the National Pension Fund, who made the decision of how much to pay the National Pension Fund, during the time period of January 1, 2009 through February 28, 2013?
A: Myself and [Henneborn].
Q: Who were signatories to the checking accounts of All Seasons, during January 1, 2009 through February 28, 2013? A: [Henneborn] and I.
Q: Was there anybody else that was allowed to sign checks?
A: No.
Q: When [Egan] sent remittance records and payments to the National Pension Fund, were they electronic or were they through a check?
A: Through a check, I believe.
Q: Who would sign these checks?
A: [Henneborn] and I.
Q: Who instructed [Egan] how much to pay to the National Pension Fund?
A: She would actually figure it out, what we owed. We would pay that, if we could.
Q: If you couldn’t, would you tell her how much to pay?
A: Yes.
April 2014 Dep. 21:20-22:23.
Plaintiffs’ assertion that defendant was a fiduciary under 29 U.S.C. § 1002(21)(A)(i) at the time of the alleged wrongdoing is further buttressed by the deposition testimony of Egan, All Season’s bookkeeper. At her June 5, 2014 deposition, Egan testified, inter alia, that (1) defendant had check signing authority over All Seasons checking account [Egan Dep. 19:13-16], (2) defendant and Henneborn determined how much money was paid each month when remittance reports were submitted to the National Pension Fund [Egan Dep. 10:3-20], and (3) when All Seasons did not have sufficient funds to pay the National Pension Fund, defendant and Henneborn made determinations as to how much was paid each month [Egan Dep. 10:3-11:14].
Accordingly, based upon the record placed before it, the Court finds that defendant exercised authority or control over the disposition of plan assets and is an ERISA fiduciary within the meaning of 29 U.S.C. § 1002(21)(A)(i). See LoPresti,
3. ERISA Fiduciaries and § 523(a) (tí Fiduciary Capacity
Having concluded that defendant was an ERISA fiduciary, the Court now addresses whether defendant was acting in a fiduciary capacity at the time of the alleged wrongdoing for purposes of § 523(a)(4). “Fiduciary capacity” is not de
As noted earlier 'in this Opinion, the Second Circuit Court of Appeals.has not yet determined that an ERISA fiduciary per se satisfies the fiduciary requirement of. § 523(a)(4). However, courts in the Second Circuit and in other jurisdictions have so found. See In re Kern,
In general, a statutory fiduciary is considered a fiduciary for the purposes of § 523(a)(4) if the statute: (1) defines the trust res; (2) identifies the fiduciary’s fund management duties; and (3) imposes obligations on the fiduciary prior to the alleged wrongdoing ... 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 pri- or to the alleged wrongdoing. Thus, ERISA satisfies the traditional requirements for a statutory fiduciary to qualify as a fiduciary under § 523(a)(4).
In re Hemmeter,
Here, plaintiff has presented ample evidence (i) that ERISA defined the trust res, identified the ERISA fiduciary’s duties and imposed obligations on the fiduciary prior to and without reference to the alleged wrongdoing that created the debt owed to plaintiffs, and (ii) that defendant exercised sufficient discretionary authority or - control over plan assets in Junctional terms to support this Court’s finding that he acted in fiduciary capacity for purposes of § 523(a)(4). See In re Hemmeter,
Accordingly, based on the record placed before it, the Court finds that defendant, an ERISA fiduciary, had fiduciary capacity under § 523(a)(4).
c. Defalcation
Having found that defendant acted in fiduciary capacity for purposes of § 523(a)(4), the Court must now determine whether the debt owed to plaintiffs arose from defendant’s defalcation. On this element of nondischargeability, the Court finds that the question of whether defendant defalcated with the requisite intent is a factual question that is not indisputably resolved by the evidence submitted by plaintiffs. A genuine issue of material fact exists with respect to defendant’s intent under the standard set forth by the Supreme Court in Bullock v. BankChampaign, N.A.,
[W]here the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, [defalcation] requires an intentional wrong. We include as intentional not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as the equivalent. Thus, we include reckless conduct of the kind set forth in the Model Penal Code. Where actual knowledge of wrongdoing is lacking, we consider conduct as equivalent if the fiduciary “consciously disregards” (or is willfully blind to) “a substantial and unjustifiable risk” that his conduct will turn out to violate a fiduciary duty ... That risk “must be of such a nature and degree that, considering the nature and purpose of the actor’s conduct and the circumstances known to him, its disregard involves a gross deviation from the standard of conduct that a law-abiding person would observe in the actor’s situation.”
Id. at 1759-60 (emphasis in original; citations omitted).
“By requiring the courts to make appropriate findings of conscious misbehavior or recklessness in the course of dischargeability litigation, the standard ... insures that the harsh sanction of non-dischargeability is reserved for those who exhibit some portion of misconduct.” In re Hyman,
A debtor’s state of mind is a crucial element in resolving a § 523(a)(4) cause of action. Curtis Lumber Co., Inc. v. Waldron (In re Waldron), No. 13-12190, Adv. No. 14-90008,
The Chidester court rejected the idea that a debtor’s knowledge of his duties alone was “sufficient to impute an actual purposeful mens rea” and that a debtor’s “constructive knowledge” of fiduciary duties satisfied the Bullock standard. In re Chidester,
It is well-established that summary judgment is generally inappropriate where issues of knowledge, intent, state of mind, motive, sincerity, conscience and other subjective feelings are implicated. Krishna v. Colgate Palmolive Co.,
Here, plaintiffs argue that defendant had actual knowledge of his wrongdoing, i.e., his decision not to pay plaintiffs, and consciously disregarded a substantial and unjustifiable risk that he would violate his fiduciary duties When he used assets of All Seasons to pay other business expenses. The alleged expenses paid in lieu of payment to plaintiffs include All Seasons’ payroll, through which defendant was paid a salary, entertainment, travel, country club membership, dining room expenses at the country club, rent to his own closely held corporation, and his own personal mortgage; all of which plaintiffs claim “benefit-ted no one other than” defendant.
Although plaintiffs reference payments made through All Seasons for defendant’s personal mortgage, plaintiffs fail to mention that defendant and Egan both testified that the mortgage was taken against defendant’s home in order to loan All Seasons $200,000 in further effort to keep the company operating and paying its creditors, including plaintiffs. Def. Aff. ¶ 11, 12; Egan Dep. 32:3-7. Further, defendant testified that' he borrowed another $30,000 from his father-in-law to put into the business, and, therefore, personally contributed $230,000 of his own funds into the operation of All Seasons within the last year of its operation. Id. With respect to the rent payments made by All Seasons to Hilton Avenue Associates LLC
Because the Court concludes that more than one reasonable inference may be drawn based on defendant’s conduct while All Seasons struggled financially, and witness credibility is vitally important
VI. Conclusion
For the foregoing reasons, plaintiffs’ motion for summary judgment is denied. The parties are directed to appear before the Court for a status conference on August 17,2017 at 10:00 a.m.
SO ORDERED.
Notes
. Unless otherwise stated, all statutory references are to sections of the United States Bankruptcy Code, 11 U.S.C. § 101, et seq., and will hereinafter be referred to as "§ (section number)”.
. Unless otherwise stated, citations to docket entries in the adversary proceeding. Adv. Pro. No. 14-08229-las, are cited as "(Adv. Dkt. No. -—)”.
.The Court's account of the underlying facts is drawn from the parties’ pleadings, plaintiffs' submissions in support of the motion for summary judgment, including plaintiffs’ Local Bankruptcy Rule 7056-1 Statement ("plaintiffs’ Rule 7056-1 Statement” or "Pis.' 7056-1”) [Adv. Dkt. No. 11-1], the declaration of Amy E. Strang, Esq. (the "Strang Declaration” or "Strang Deck”) [Adv. Dkt, No. 11-3], defendant’s November 7, 2014 deposition ("November 2014 Dep.”) [Strang Deck, Exhibit K], defendant’s April 23, 2014 deposition ("April 2014 Dep.’’) [Strang Deck, Exhibit M], and the June 5, 2014 deposition testimony of Patricia Egan ("Egan Dep.”) [Strang Deck, Exhibit Q], and defendant’s submissions in support of his opposition to the motion [Adv. Dkt. No. 16], including defendant’s affidavit ("Def. Aff.”) [Adv. Dkt. No. 16-1], and defendant’s Rule 7056-1 Statement ("Def. 7056-1”) [Adv. Dkt. No. 16-2],
. Charles H. Henneborn ("Henneborn”), Vice President of All Seasons, held the remaining shares, Henneborn filed for chapter 7 relief on June 19, 2013 (See Case No, 13-73280-las). Plaintiffs filed a similar complaint against Henneborn (See Adv. Pro. No. 13-8111-las).
. Neither party expressly states whether the delinquent contributions at issue here are employer contributions or employee contributions, Paragraphs 13 and 18 of the complaint refer to employer contributions and paragraphs 5 and 16 of plaintiffs’ 7056-1 statement likewise refers to employer contributions. In addition, upon review of the collective bargaining agreements, it appears the contributions at issue are employer contributions, As such, the Court will assume that the ■delinquent contributions are employer contributions for purposes of plaintiffs’ motion.
. ERISA defines “employee welfare benefit plan” as: any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or (B) any benefit described in section 186(c) of this title (other than pensions on retirement or death, and insurance to provide such pensions). 29 U.S.C. § 1002(1).
. The Supreme Court recognized that the Second Circuit interpreted "defalcation” similarly for years without difficulty. Id. at 1761 (citing In re Hyman,
. Defendant and Henneborn are the owners of Hilton Avenue Associates LLC with defendant having a 70% ownership interest and Henneborn 30%. April 2014 Dep. 31:8-32:3.