By: Devin Sullivan
St. John's Law Student
American Bankruptcy Institute Law Review Staff
The federal courts are currently split on the issue of whether the functional definition of "fiduciary" used in ERISA constitutes a “fiduciary” for purposes of the section 523(a)(4) discharge exception when the ERISA fiduciary fails to comply with ERISA obligations. At stake in two recent cases was the status of a corporate officer's liability where employee contributions withheld by the corporate employer were not remitted to the pension and welfare funds. In In re Mayo,
the Vermont Bankruptcy Court sided with those courts finding that being an ERISA fiduciary makes a debtor a fiduciary under the Code. As a result, the owner of a steel erection company, when declaring personal bankruptcy, was barred from discharging the $181,000 debt his company owed under a collective bargaining agreement to the employee benefit funds. Meanwhile, the Sixth Circuit in In re Bucci
[2]
went the other way in permitting a company president to discharge his liability for the debt his company owed to a multiemployer pension fund, holding that his status as an ERISA fiduciary was not sufficient to trigger the bankruptcy discharge exception.
[3]
Section 523(a)(4) provides that an individual debtor may not discharge any debt for fraud or defalcation (unauthorized appropriation of money) while acting in a fiduciary capacity, embezzlement, or larceny.
[4]
[5]
the court held that a defalcation is limited to situations where the parties to a creditor-debtor relationship intended for the debtor to act as trustee of the monies owed. Indeed, section 523(a)(4) requires the existence of express or technical trust in order to find the relationship a fiduciary relationship.
[6]
Although there is a technical trust in the ERISA context, ERISA uses a functional test, rather than a formal one, to determine who is an ERISA fiduciary.
[7]
This explains the differing approaches of the courts. Exceptions to discharge generally are construed narrowly and the Bucci court viewed the duty to remit funds as merely a contractual obligation since there was no evidence that Bucci assumed a formal trustee role.
[8]
Although the Supreme Court has denied certiorari for Bucci, the issue continues to divide the courts as the Mayo decision demonstrates. It will be interesting to see if the current economic climate influences the courts to take a more lenient or strict view of what constitutes a fiduciary relationship in order to safeguard employee monies from employer misuse.
[2]
Bd. of Trustees of the Ohio Carpenters’ Pension Fund v. Bucci (In re Bucci), 493 F.3d 635 (6th Cir. 2007), cert. denied, 128 S. Ct. 2903 (2008).
[3]
See also Hunter v. Philpott, 373 F.3d 873 (8th Cir. 2004) (holding corporation co-owner who entered into collective bargaining agreement with union that required it to make contributions to benefit funds had not assumed status of trustee, and did not stand in fiduciary capacity within meaning of dischargeability exception).
[4]
11 U.S.C. § 523(a)(4) (2006); see Capitol Indemnity Corp. v. Interstate Agency Inc. (In re Interstate Agency), 760 F.2d 121, 125 (6th Cir. 1985) (holding a defalcation encompasses not only embezzlement and misappropriation by a fiduciary, but also the failure to properly account for such funds).
[6]
11 U.S.C. § 523(a)(4) (2006); In re Twitchell, 91 B.R. 961, 964-65 (D. Utah 1988) (acknowledging the Supreme Court favors a narrow construction of the term “fiduciary capacity” and defines the term as meaning arising from an express or technical trust).
[7]
In re Mayo, 2007 WL 2713064, at *8 (explaining an ERISA fiduciary exercises control and authority over the plan, a definition of functional terms, not formal trusteeship).
- webadmin's blog
- Log in to post comments