U.S. Department of Labor v. Michael Harris ( 2017 )

United States Bankruptcy Appellate Panel
For the Eighth Circuit
___________________________
No. 16-6024
___________________________
In re: Michael P. Harris, As surety for Faribault Mills Inc., As surety for Faribault
Woolen Mill Company
lllllllllllllllllllllDebtor
------------------------------
U.S. Department of Labor
lllllllllllllllllllll Plaintiff - Appellee
v.
Michael P. Harris
lllllllllllllllllllll Defendant - Appellant
____________
Appeal from United States Bankruptcy Court
for the District of Minnesota - Minneapolis
____________
Submitted: December 8, 2016
Filed: January 6, 2017
____________
Before FEDERMAN, Chief Judge, SALADINO and NAIL, Bankruptcy Judges.
____________
FEDERMAN, Chief Judge
Debtor Michael Harris appeals from the Bankruptcy Court’s 1 Order granting
summary judgment in favor of the United States Department of Labor and declaring
the Debtor’s debt to it nondischargeable pursuant to 11 U.S.C. § 523(a)(4). For the
reasons that follow, we AFFIRM.
INTRODUCTION
The Department of Labor obtained a pre-bankruptcy judgment against the
Debtor in the United States District Court, which found that, under ERISA, the
Debtor breached his fiduciary duty when the company of which he was CEO failed
to remit funds withheld from its employees’ paychecks for their health insurance
plan. The DOL sought to have that judgment debt declared nondischargeable as a
debt for defalcation while acting in a fiduciary capacity under 11 U.S.C. § 523(a)(4).
In granting summary judgment in favor of the DOL on its nondischargeability
action, the Bankruptcy Court was required to determine that the Debtor committed
defalcation, while acting in a fiduciary capacity, within the meaning of § 523(a)(4)
of the Bankruptcy Code. As will be shown, that holding required the Bankruptcy
Court to conclude: (1) that the health insurance premiums withheld from employee
wages were held in trust by the employer until they were paid into the health plan
(in other words, that there was a trust res); (2) that the Debtor himself was a fiduciary
of that trust within the meaning of § 523(a)(4); and (3) that the Debtor’s decision not
to remit withheld wages to the health plan constituted defalcation within the meaning
of that statute.
1
The Honorable Michael E. Ridgway, United States Bankruptcy Judge for
the District of Minnesota.
2
STANDARD OF REVIEW / SUMMARY JUDGMENT /
COLLATERAL ESTOPPEL
The BAP reviews de novo the bankruptcy court’s grant of summary
judgment. 2 Summary judgment is appropriate “only when all the evidence presented
demonstrates that ‘there is no genuine issue as to any material fact and the moving
party is entitled to judgment as a matter of law.’” 3
The Bankruptcy Court here gave collateral estoppel effect to certain of the
District Court’s factual findings in the ERISA case.
The binding effect of a former adjudication, often generically termed
res judicata, can take one of two forms. Claim preclusion (traditionally
termed res judicata or “merger and bar”) bars relitigation of the same
claim between parties or their privies where a final judgment has been
rendered upon the merits by a court of competent jurisdiction. Issue
preclusion (or “collateral estoppel”) applies to legal or factual issues
actually and necessarily determined, with such a determination
becoming conclusive in subsequent suits based on a different cause of
action involving a party to the prior litigation.4
Collateral estoppel bars relitigation of a factual issue if the following
requirements are met: (1) the issue sought to be precluded must be the same as that
involved in the prior action; (2) the issue must have been actually litigated; (3) the
issue must have been determined by a valid and final judgment; and (4) the
determination must have been essential to the prior judgment. 5 The party seeking to
2
Burk v. Beene, 948 F.2d 489, 492 (8th Cir.1991); Jafarpour v. Shahrokhi
(In re Shahrokhi), 266 B.R. 702, 706 (B.A.P. 8th Cir. 2001).
3
In re Shahrokhi, 266 B.R. at 706 (citations omitted).
4
In re Anderberg-Lund Printing Co., 109 F.3d 1343, 1346 (8th Cir. 1997)
(citations and internal quotation marks omitted).
5
See Johnson v. Miera (In re Miera), 926 F.2d 741, 743 (8th Cir. 1983).
3
apply collateral estoppel has the burden of proving that all four elements are present.6
“Collateral estoppel may only be applied if the party against whom the earlier
decision is being asserted had a ‘full and fair’ opportunity to litigate the issue in the
prior adjudication.”7
With regard to the three above-mentioned conclusions required for summary
judgment under § 523(a)(4), we hold that the Bankruptcy Court did not err in giving
collateral estoppel effect to the District Court’s findings that the funds withheld from
the employees’ paychecks constituted a trust res and that ERISA imposed fiduciary
duties upon the Debtor as to those funds. We further hold that the Bankruptcy Court
did not err in concluding that the Debtor’s ERISA fiduciary duties satisfied §
523(a)(4)’s definition of a fiduciary. Finally, we hold that the undisputed facts
support the conclusion that the Debtor committed defalcation while acting in that
fiduciary capacity under § 523(a)(4).
THE UNDISPUTED FACTS
The parties filed an agreed statement of undisputed facts which were based
largely on (were nearly identical to) the District Court’s findings in the ERISA case.
As relevant here:
Faribault Woolen Mills Company was a blanket manufacturing company
established in 1865. The Debtor became its CEO, President, and Board Chairman
in 2001. He owned 0.3% or less of Faribault’s outstanding stock and had common
stock options.
Faribault sponsored, and was the Plan Administrator for, a Health Plan to
provide health insurance for its employees. The Health Plan contracted with
6
Id.
7
Id. (citation omitted).
4
HealthPartners Health Insurance Company to provide the healthcare benefits for the
plan participants. The participants (employees) paid 100% of the premiums via
payroll deductions. Faribault withheld the premiums from the paychecks and sent
monthly payments to HealthPartners on the first of each month to provide coverage
for that month. Faribault did not create a separate account to hold the deductions;
rather, it held them in its general operating account from which other corporate
expenses were paid.
Gary Glienke, Faribault’s Vice President of Human Resources, was
responsible for receiving and rectifying the bills from HealthPartners for the health
insurance premiums. He would then send the bills to Carla Craig, the Accounts
Payable Administrator at Faribault. From January 2008 through April 1, 2009, the
Debtor; Gleinke; and Faribault’s CFO, Carmen Dorr, all had signatory authority on
the general operating account, payroll account, and other Faribault accounts.
Faribault’s payments to HealthPartners were untimely ten times in 2008,
including two bounced checks, but the company was able to obtain extensions of
time for payment, so coverage was not terminated. However, on January 27, 2009,
Faribault issued a check, signed by the Debtor, to HealthPartners for $22,593.02 to
pay the premiums owed for January 2009. That check also bounced.
In a letter dated February 28, 2009, HealthPartners informed Glienke that the
January check had bounced and that it intended to cancel the Health Plan if Faribault
did not pay in full. HealthPartners also sent letters to the Plan participants, informing
them that Faribault had failed to remit the January premium payment. Since the
Debtor was a Plan participant, he received that letter.
Meanwhile, on February 27 (the day before the bounced-check letters were
sent), Faribault issued another check signed by the Debtor to HealthPartners for
$19,466.91 to pay the February premium. HealthPartners returned that check to
5
Faribault, along with a notice that HealthPartners would now only accept wire
payments due to the prior bounced checks.
On March 26, the Debtor personally asked HealthPartners for an extension to
pay the January and February premiums. HealthPartners denied that request and
demanded full payment of the January and February premiums by March 31. It is
undisputed that the total available to Faribault for payment to HealthPartners
between March 26 and 31 was in excess of $70,000,8 but Faribault paid other
expenses instead. It is also undisputed that, from that $70,000, the Debtor directed
that Faribault make a March 30 payment of $4,000 to his American Express account,
and a March 31 payment of $21,531.48 on his home equity line of credit.9
While this was happening, the Faribault Board, on March 27, 2009, voted to
retain a turnaround consultant. Harris lost control of the company’s finances
sometime after March 2009, and resigned as CEO in May 2009. The company was
later liquidated.10
HealthPartners canceled the policy on April 1, 2009, retroactive to January
31, 2009, due to non-payment of the premiums. Faribault never remitted $55,040.61
it had withheld from the employees’ paychecks for insurance premiums from
January 9 to March 20, 2009. Forty-two employees (and some of their families)
were affected by the Plan’s cancelation.
8
Statement of Uncontested Facts ¶ 56.
9
Id. Faribault made another payment for the Debtor’s benefit on March 27,
in the amount of $1,500, but the Statement of Uncontested Facts does not expressly
state that the Debtor personally directed that payment be made. Id.
10
Id. at ¶¶ 44 and 49.
6
On December 19, 2012, the Secretary of the Department of Labor filed a
lawsuit against the Debtor, alleging he violated ERISA by failing to remit the
$55,040.61 in withheld healthcare premiums to HealthPartners. Specifically, the
Secretary alleged that, by failing to remit the withheld premiums, the Debtor
breached his fiduciary duty of loyalty to Faribault’s employees and their Health Plan
in violation of ERISA § 404(a)(1)(A), 29 U.S.C. § 1104(a)(1)(A). Following a three-
day bench trial, on November 9, 2015, the District Court for the District of
Minnesota entered judgment in favor of the DOL in the total amount of $67,839.60
(which included pre-judgment interest), concluding that the Debtor violated his
fiduciary duty of loyalty under ERISA by diverting the employee contributions to
pay for corporate expenses and his own home equity loan.
The Debtor filed a Chapter 7 bankruptcy case on November 23, 2015. The
DOL filed an unsecured claim for $67,839.60 based on the judgment. It also filed
this nondischargeability action under § 523(a)(4). After both parties filed motions
for summary judgment, the Bankruptcy Court granted the DOL’s motion for
summary judgment at a hearing held on July 19, 2016.
NONDISCHARGEABILITY UNDER 11 U.S.C. § 523(a)(4)
Section 523(a)(4) excepts from an individual debtor’s discharge any debt “for
fraud or defalcation while acting in a fiduciary capacity.” 11 The exception to
discharge under §523(a)(4) is construed narrowly against the creditor opposing
discharge.12
“The fiduciary relationship must be one arising from an express or technical
trust, and, thus, the fiduciary relationship required under section 523(a)(4) is more
11
11 U.S.C. § 523(a)(4).
12
In re Thompson, 686 F.3d 940, 944 (8th Cir. 2012).
7
narrowly defined than that under the general common law.” 13 Although often
created by contract, a trust relationship satisfying § 523(a)(4) can be created by
statute,14 such as ERISA. However:
It is not enough [ ] that a statute purports to create a trust: A [statute]
cannot magically transform ordinary agents, contractors, or sellers into
fiduciaries by the simple incantation of the terms “trust” or “fiduciary.”
Rather, to meet the requirements of § 523(a)(4) a statutory trust must
(1) include a definable res and (2) impose “trust-like” duties.15
In addition, the debtor must be a trustee “before the wrong and without reference
thereto.”16
Thus, as stated by the Bankruptcy Court, summary judgment in this case
turned on three questions: (1) was there a trust res?; (2) did the Debtor (as opposed
to just the Faribault corporation) have fiduciary responsibilities with respect to that
trust?; and (3) did the Debtor commit defalcation in directing that Faribault pay
expenses other than the past due premiums in the last week of March 2009? We
treat each question in turn.
13
In re Shahrokhi, 266 B.R. at 707 (citing Tudor Oaks L.P. v. Cochrane (In
re Cochrane), 124 F.3d 978, 984 (8th Cir. 1997), cert denied, 522 U.S. 1112, 118
S. Ct. 1044, 40 L. Ed. 2d 109 (1998); Barclays Am./Bus. Credit, Inc. v. Long (In re
Long), 774 F.2d 875, 878 (8th Cir. 1985)).
14
In re Nail, 680 F.3d 1036, 1039-40 (8th Cir. 2012).
15
Id. (citation omitted).
16
Id. at 1041 (citation omitted).
8
Were Funds Withheld from Employee Wages Held in Trust?
In its ERISA judgment, the District Court found that the $55,000 in employee
health insurance benefit premiums that were withheld from the paychecks were
“plan assets” and that they became so as of the date on which the employees’ wages
were paid (i.e., the date on which the employees’ contributions were withheld).17
There is no genuine issue of material fact as to the amounts withheld from wages
and not paid over to the fund. The issue on this point is whether a trust was created
in those “plan assets,” sufficient that fiduciary duties can be imposed under §
523(a)(4).
The Debtor relies primarily on In re Long 18 and Hunter v. Philpott 19 in support
of his position that he was not a fiduciary under § 523(a)(4). In Long, the Eighth
Circuit held that § 523(a)(4) only applies to trustees of express trusts, in the “strict
and narrow sense,” and that corporate officers should not automatically be impressed
with the corporation’s fiduciary responsibilities. Instead, the Eighth Circuit said,
“[i]t is the substance of the transaction, rather than the labels assigned by the parties,
which determines whether there is a fiduciary relationship for bankruptcy
purposes.20
Hunter v. Philpott was a § 523(a)(4) case in which the debtor was an officer
of a corporation which was contractually obligated to make payments to funds on
17
Citing 29 C.F.R. § 2510.3-102(a)(1); Trs. of the Graphic Commc’ns Int’l
Union Upper Midwest Local 1M Health & Welfare Plan v. Bjorkedal, 516 F.3d
719, 733 (8th Cir. 2008).
18
774 F.2d 875 (8th Cir. 1985).
19
373 F.3d 873 (8th Cir. 2004).
20
In re Long, 774 F.2d at 878-89.
9
behalf of employees, and thus found to have fiduciary obligations under ERISA. In
that case, despite being a fiduciary under ERISA, the Eighth Circuit held that the
officer could not be held liable as a fiduciary under the “strict and narrow” sense
required under § 523(a)(4).21 The Eighth Circuit instructed courts to first “look
specifically at the property that is alleged to have been defalcated to determine
whether [the debtor-officer] was legally obligated to hold that specific property for
the benefit of the Funds.”22 In other words, although the Eighth Circuit did not
expressly say so in Hunter, the implication is that if there is no specific property –
no res – then there can be no § 523(a)(4) fiduciary duties imposed on the officer. In
part because neither the corporation nor the debtor-officer in Hunter had a legal
obligation to hold the employer contributions for the benefit of the plan (or
employees), the debtor-officer was held not to have fiduciary duties under §
523(a)(4).
Critically, Hunter v. Philpott did not involve funds that had been withheld
from employee wages; rather, that case involved corporate contractual obligations
to make the payments for the employees’ benefit. Therefore, while the officer in
Hunter v. Philpott may have been liable as a fiduciary under ERISA, he was not
liable under § 523(a)(4).
Here, in contrast, Faribault had withheld the Health Plan premiums from the
employees’ paychecks, and the District Court held that those premiums became
“plan assets” as of the dates on which the employees’ paychecks were cut. In other
words, in contrast to Hunter v. Philpott – where the corporation simply failed in its
obligation to pay a bill for the benefit of employees – Faribault was holding funds
21
Hunter v. Philpott, 373 F.3d at 876.
22
In re Pottebaum, 2013 WL 5592368 (Bankr. N.D. Iowa Oct. 9, 2013)
(quoting Hunter v. Philpott, 373 F.3d at 875).
10
that actually belonged to someone else – hence, the trust res – and it had a duty to
use the employees’ money to make the premium payments. Consistent with this
premise, there is a clear division in the bankruptcy cases as to whether a trust res is
created, depending on whether the funds to be contributed have been withheld from
employee wages, or are simply a debt of the company. 23 Unlike Hunter, this case
fits squarely with those cases holding that a trust is created when the employer
withholds wages for payments to a plan providing benefits to employees. Therefore,
in contrast to Hunter, a trust res was created here.
23
Compare, In re Luna, 406 F.3d 1192, 1208 (10th Cir. 2005) (stating that the
court was not inclined to hold that officers of a company with an ERISA-covered
fund automatically become fiduciaries under the Bankruptcy Code); In re Halpin,
370 B.R. 45, 50 (N.D. N.Y. 2007) (holding that the debtor did not bear fiduciary
responsibilities with regard to unpaid employer contributions); In re Popovich, 359
B.R. 799, 806 (Bankr. D. Colo. 2006) (finding failure to make employer
contributions was a breach of contract, but not a breach of fiduciary duty); In re
Tsikouris, 340 B.R. 604, 617 (Bankr. N.D. Ind. 2006) (the promise to pay an
employer’s component of plan contributions creates just another debt); In re
Engleman, 271 B.R. 366, 370 (Bankr. W.D. Mo. 2001) (no fiduciary duty as to
employer obligations to contribute), with Chao v. Gott (In re Gott), 387 B.R. 17
(Bankr. S.D. Iowa 2008) (discussing the distinction between employer contributions
and a failure to properly apply employee contributions or invest employee assets);
Eavenson v. Ramey, 243 B.R. 160, 166 (N.D. Ga. 1999) (finding the debtor used
employee contributions as general funds); Chao v. Johnson (In re Johnson), 2007
WL 646376, at *5 (S.D. Tex. Feb. 26, 2007) (finding the debtor permitted employee
contributions to be commingled with corporate accounts); In re O'Quinn, 374 B.R.
171, 175 (Bankr. M.D. N.C. 2007) (finding debtor failed to apply amounts deducted
from an employee’s paycheck toward ERISA plan insurance premiums); In re
Weston, 307 B.R. 340, 343 (Bankr. D. N.H. 2004) (finding debtor failed to
adequately fund health plan with employee contributions); In re Gunter, 304 B.R.
458, 462 (Bankr. D. Colo. 2003) (amounts withheld from employee wages for
pension funds were a res subject to fiduciary obligations); In re Coleman, 231 B.R.
393, 396 (Bankr. S.D. Ga. 1999) (fiduciary duty exists as to funds withheld from
employee wages).
11
Was the Debtor a Fiduciary under § 523(a)(4)?
As stated above, funds withheld from an employee’s wages are held in trust
by the employer, and ERISA imposes fiduciary obligations as to such a trust upon
anyone who 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.24 In contrast to § 523(a)(4)’s “strict and
narrow” construction, under ERISA, the term “fiduciary” is to be broadly
construed.25
The District Court here found that, under ERISA, the Debtor exercised
authority or control respecting the management or disposition of the Health Plan
premiums withheld from Faribault’s employees’ paychecks. The District Court said
the question of fiduciary status does not hinge on whether an individual is intimately
involved in – and exercises authority or control over – every financial matter within
a company; rather, the relevant inquiry under ERISA is whether the individual
24
29 U.S.C. § 1002(21)(A) states, specifically:
(21)(A) Except as otherwise provided in subparagraph (B), 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) he has any discretionary
authority or discretionary responsibility in the administration of such
plan. Such term includes any person designated under section
1105(c)(1)(B) of this title.
25
Consol. Beef Indus., Inc. v. N.Y. Life Ins. Co., 949 F.2d 960, 964 (8th Cir.
1991).
12
“exercises any authority or control respecting management or disposition of [plan]
assets.”26 The Debtor did, the Court held, exercise such authority and control.
Therefore, the Debtor was found to be an ERISA fiduciary from at least January 1,
2009 to March 31, 2009. The question here is whether that statutory fiduciary status,
imposed by ERISA, is sufficient to impose fiduciary duties on the Debtor for
purposes of § 523(a)(4).
As stated, the Debtor, the CFO, and the Vice President of Human Resources
all had signing authority on Faribault’s checking accounts. However, the Debtor
concedes that, as CEO, he had the ultimate authority as to which bills to pay. 27 The
District Court found that the Debtor “was personally involved – and exercised his
authority – in the decision not to remit employee withholdings to the Health Plan,”28
and that he “instead us[ed] those assets to pay corporate creditors and personal
expenses.”29 And, the District Court found that the Debtor’s authority existed
throughout the period in which funds withheld from wages were not remitted to
HealthPartners. 30 Because the issue of the Debtor’s authority and control over the
employee withholdings during the relevant timeframe is (1) the same as that
involved in the ERISA action; (2) was actually litigated; (3) was determined by a
26
Findings of Fact, Conclusions of Law, and Order for Judgment, Case No.
12-CV-3136, attached as Exhibit 3 to Defendant’s Notice of Hearing and Motion
for Summary Judgment, ECF No. 11 at 25 (emphasis in original).
27
See Appellant’s Brief at 4.
28
Findings of Fact, Conclusions of Law, and Order for Judgment at 24.
29
Id. at 27.
30
Id. at 24.
13
valid and final judgment; and (4) was essential to the prior judgment, collateral
estoppel applies to those findings. 31
Thus, the DOL established that, in the last week of March 2009, it was the
Debtor who chose to pay other bills, rather than the premiums necessary to maintain
health insurance coverage for the employees. The Debtor was the person who had
ultimate responsibility to determine which bills would be paid out of the company’s
scarce resources, and he exercised that authority to his own benefit. We conclude
that the Bankruptcy Court properly held that the Debtor had fiduciary
responsibilities with respect to funds that had been withheld from wages for payment
to HealthPartners.
Did the Debtor Commit Defalcation as to the Health Plan Funds?
“Defalcation is defined as the misappropriation of trust funds or money held
in any fiduciary capacity; [and the] failure to properly account for such funds.”32 As
the Debtor points out, and the DOL acknowledges, the Supreme Court held in
Bullock v. Bankchampaign NA,33 that defalcation under § 523(a)(4) requires a
showing of intentional wrong.
[W]here the conduct at issue does not involve bad faith, moral
turpitude, or other immoral conduct, the term 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
31
See Johnson v. Miera (In re Miera), 926 F.2d 741, 743 (8th Cir. 1983).
32
In re Cochrane, 124 F.3d 978, 984 (8th Cir. 1997).
33
133 S. Ct. 1754, 1759, 185 L. Ed. 2d 922 (2013).
14
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.34
As stated, while reckless conduct may be sufficient, it must be “reckless conduct of
the kind that the criminal law treats as the equivalent.”35
As the DOL suggests, the District Court held that the Debtor breached his
ERISA fiduciary duty when he “deci[ded] not to remit the employee withholdings
to HealthPartners,” and “instead us[ed] those assets to pay corporate creditors and
personal expenses.” However, the District Court did not make any findings with
regard to the standard of intent under § 523(a)(4). We therefore turn to the
undisputed facts.
There is no dispute that the Debtor was informed in early March that the
expected financing had fallen through. It is further undisputed that, by at least March
26, 2009, the Debtor knew that the January and February premium payments had not
been made and that HealthPartners had demanded full payment before March 31 or
the Plan would be canceled. Indeed, on March 26, the Debtor personally requested
an extension of the March 31 deadline to pay HealthPartners, and was rejected. Also,
it is undisputed that between March 26 and March 31, over $70,000 was either
transferred to other Faribault accounts or was used to pay creditors and expenses
other than HealthPartners. Moreover, it is undisputed that the Debtor directed Dorr
34
133 S. Ct. at 1759-60 (emphasis in original; citations omitted).
35
133 S. Ct. at 1759.
15
to pay his own home equity line of credit and other expenses instead of
HealthPartners between March 26 and March 31.
The Bankruptcy Court held that such acts constitute an intentional
misappropriation of trust funds, or at the least, a misappropriation of trust funds
undertaken with conscious disregard to the substantial and justifiable risk that doing
so would result in a breach of fiduciary duty of loyalty. The Court found that simply
paying HealthPartners instead of other corporate expenses would have fulfilled that
duty. 36 In other words, the Debtor committed defalcation as that term is used in §
523(a)(4) when he knowingly failed to remit employee contributions to
HealthPartners and instead knowingly used those funds to pay for other corporate
expenses.
Raso v. Fahey (In re Fahey) 37 is a post-Bullock case with facts similar to the
ones here. There, the court concluded that the debtor had committed defalcation
when he violated his duty of loyalty to an ERISA plan, explaining:
The Debtor does not dispute that he was aware of his obligations to the
Funds, but nonetheless failed to remit the assets. Instead, the undisputed
facts indicate that the Debtor prioritized the payment of corporate
expenses that were beneficial to him . . . over his obligations to the
Funds. In so doing, he violated the duty of loyalty to the beneficiaries
of the Funds . . . [and] committed a defalcation within the meaning of
11 U.S.C. § 523(a)(4). 38
36
See Stoughton Lumber Co. v. Sveum, 787 F.3d 1174, 1177 (7th Cir. 2015)
(defining “gross recklessness” under Bullock as “knowing that there is a risk of
serious harm and that it can be averted at reasonable cost, yet failing to act on that
knowledge”).
37
494 B.R. 16 (Bankr. D. Mass. 2013).
38
Id. at 21-22.
16
The Debtor points out that until late March, he did not know that the January
and February premiums had not been paid. He also points out that he personally
borrowed over $900,000 from his home equity line of credit, apparently in an attempt
to keep Faribault afloat. He also chose not to seek reimbursement of over $31,000
in expenses at the end. And, he took only one paycheck in the first quarter of 2009.
Furthermore, he was working hard at the end trying to find investors and financing
and, indeed, until early March, he believed he had obtained $12.5 million in
financing, which would have fully paid all the premiums. The Debtor asserts that,
as in In re Pottebaum,39 which held that there was no defalcation, he was only trying
to keep the company afloat so everyone could get paid.
But the Debtor misses the issue, which is his state of mind between March 26
and March 31, when he chose not to pay approximately $55,000 to maintain the
employees’ health insurance, despite having more than $70,000 available during that
time. By then, the Debtor had been advised that the financing had fallen through
and that HealthPartners would not grant Faribault an extension on payment. There
is no genuine issue as to these facts.
Debtor also argues that there were not sufficient funds to pay the premium in
full, so he chose to pay other bills instead. DOL responds by saying that, even if
there were less than $55,000 available as of March 26, whatever funds were there
were being held in trust for the employees, and therefore should have either been
used to pay the premiums due or returned to the employees. Between March 26 and
31, the Debtor knew that more than $55,000 of the funds in Faribault’s operating
accounts were withheld from employee wages and did not belong to the company –
yet, the Debtor chose to use those funds to pay personal and corporate expenses.
39
2013 WL 5592368 (Bankr. N.D. Iowa Oct. 9, 2013).
17
On a summary judgment motion, the burden on the moving party “is only to
demonstrate, i.e., to point out . . . , that the record does not disclose a genuine dispute
on a material fact.”40 The non-moving party then must set forth specific facts
showing a genuine issue of material fact for trial.41 “A fact is material if it might
affect the outcome of the suit, and a dispute is genuine if the evidence is such that it
could lead a reasonable jury to return a verdict for either party.” 42 “A court
considering a motion for summary judgment must view the facts in the light most
favorable to the non-moving party and give that party the benefit of all reasonable
inferences that may be drawn from those facts.”43 The bankruptcy court is not to
weigh evidence and make credibility determinations, or to attempt to determine the
truth of the matter, but is, rather, solely to determine whether there is a genuine issue
of fact for trial.44 “Conclusional allegations and denials, speculation, improbable
40
City of Mt. Pleasant, Iowa v. Assoc. Elec. Cooperative, Inc., 838 F.2d
268, 273 (8th Cir. 1988) (internal quote marks, brackets, and citation omitted).
41
Dico, Inc. v. Amoco Oil Co., 340 F.3d 525, 529 (8th Cir. 2003). See also
Brunsting v. Lutsen Mountains Corp., 601 F.3d 813, 820 (8th Cir. 2010) (holding
that the non-movant may not rest upon mere allegations of denials in its pleadings,
but must set forth sufficient admissible evidence to create a genuine issue of
material fact in order to avoid summary judgment).
42
U.S. Bank Nat=l Assoc. v. U.S. Rent a Car, Inc., 2011 WL 3648225 at *3
(D. Minn. Aug. 17, 2011) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
248 (1986)).
43
Id. (citing Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475
U.S. 574, 578 (1986)).
44
Will. v. Marlar (In re Marlar), 252 B.R. 743, 750 (B.A.P. 8th Cir.
2000) (citations omitted).
18
inferences, unsubstantiated assertions, and legalistic argumentation do not
adequately substitute for specific facts showing a genuine issue for trial.”45
The Bankruptcy Court held that the Debtor acted with “conscious disregard
to a substantial and unjustifiable risk that his conduct [in not using the $70,000 to
either pay the premiums or repay the employees] would violate a fiduciary duty.”
Based on the undisputed facts, and based on the Debtor’s failure to offer a justifiable
reason for his decision not to use the remaining funds for the benefit of the
employees for whom they were held in trust, the Bankruptcy Court properly
concluded that there was no genuine issue of material fact as to his intent, and that
DOL was entitled to judgment as a matter of law.
_______________________
45
Oliver v. Scott, 276 F.3d 736, 744 (5th Cir. 2002).
19