Contractors, Laborers, etc. v. M & S Grading, Inc. ( 2008 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 07-3909
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In re: M & S Grading, Inc., *
*
Debtor, *
*
--------------------------------------------- *
*
Contractors, Laborers, Teamsters *
and Engineers Health and Welfare *
Plan; Contractors, Laborers, Teamsters *
and Engineers Pension Plan; Dean *
Hightree; Kim Quick; Tom Merksick; *
Calvin G. Negus; Vic J. Lechtenberg; *
Eugene Lea, Trustees, *
*
Creditors - Appellants, *
* Appeal from the United States
v. * District Court for the
* District of Nebraska.
M & S Grading, Inc., *
*
Debtor - Appellee. *
*
--------------------------------------------- *
*
Contractors, Laborers, Teamsters *
and Engineers Pension Plan; *
Contractors, Laborers, Teamsters and *
Engineers Health and Welfare Plan; *
Dean Hightree; Kim Quick; Tom *
Merksick; Calvin G. Negus;Vic J. *
Lechtenberg; Eugene Lea, Trustees; *
Official Committee of Unsecured *
Creditors of MSGrading, Inc., *
*
Creditors, *
*
v. *
*
M & S Grading, Inc., *
*
Debtor. *
*
--------------------------------------------- *
*
Dean Hightree; Kim Quick; Calvin *
G. Negus; Vic J. Lechtenberg; Eugene *
Lea, Trustees; Contractors, Laborers, *
Teamsters and Engineers Health and *
Welfare Plan; Contractors, Laborers, *
Teamsters and Engineers Pension Plan; *
Tom Merksick, *
*
Plaintiffs, *
*
Official Committee of Unsecured *
Creditors of MSGrading, Inc., *
*
Creditor, *
*
v. *
*
First National Bank of Omaha, *
*
Defendant, *
*
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James Killips, Trustee for Debtor *
M & S Grading, Inc., *
*
Trustee. *
*
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No. 07-3914
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In re: M & S Grading, Inc., *
*
Debtor, *
*
--------------------------------------------- *
*
Contractors, Laborers, Teamsters and *
Engineers Health and Welfare Plan; *
Contractors, Laborers,Teamsters and *
Engineers Pension Plan; Dean Hightree; *
Kim Quick; Tom Merksick; Calvin G. *
Negus; Vic J. Lechtenberg; Eugene Lea, *
Trustees, *
*
Creditors, *
*
v. *
*
M & S Grading, Inc., *
*
Debtor. *
*
--------------------------------------------- *
*
Contractors, Laborers, Teamsters and *
Engineers Health and Welfare Plan; *
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Contractors, Laborers, Teamsters and *
Engineers Pension Plan; Dean Hightree; *
Kim Quick; Tom Merksick; Calvin G. *
Negus; Vic J. Lechtenberg; Eugene Lea, *
Trustees, *
*
Creditors - Appellants, *
*
and *
*
Official Committee of Unsecured *
Creditors of MSGrading, Inc., *
*
Creditor, *
*
v. *
*
M & S Grading, Inc., *
*
Debtor - Appellee. *
*
--------------------------------------------- *
*
Dean Hightree; Kim Quick; Calvin G. *
Negus; Vic J. Lechtenberg; Eugene Lea, *
Trustees; Contractors, Laborers, *
Teamster and Engineers Health and *
Welfare Plan; Contractors, Laborers, *
Teamsters and Engineers Pension *
Plan; Tom Merksick, *
*
Plaintiffs, *
*
Official Committee of Unsecured *
Creditors of MSGrading, Inc., *
*
Creditor, *
-4-
*
v. *
*
First National Bank of Omaha, *
*
Defendant, *
*
James Killips, Trustee for Debtor *
M & S Grading, Inc., *
*
Trustee. *
*
___________
No. 08-1001
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In re: M & S Grading, Inc., *
*
Debtor, *
*
--------------------------------------------- *
*
Contractors, Laborers, Teamsters and *
Engineers Health and Welfare Plan; *
Contractors, Laborers, Teamsters and *
Engineers Pension Plan; Dean Hightree; *
Kim Quick; Tom Merksick; Calvin G. *
Negus; Vic J. Lechtenberg; Eugene *
Lea, Trustees, *
*
Creditors, *
*
v. *
*
M & S Grading, Inc., *
*
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Debtor, *
*
--------------------------------------------- *
*
Contractors, Laborers, Teamsters and *
Engineers Pension Plan; Contractors, *
Laborers, Teamsters and Engineers *
Health and Welfare Plan; Dean *
Hightree; Kim Quick; Tom Merksick; *
Calvin G. Negus; Vic J. Lechtenberg; *
Eugene Lea, Trustees; Official *
Committee of Unsecured Creditors of *
MSGrading, Inc., *
*
Creditors, *
*
v. *
*
M & S Grading, Inc., *
*
Debtor, *
*
--------------------------------------------- *
*
Dean Hightree; Kim Quick; Calvin G. *
Negus; Vic J. Lechtenberg; Eugene Lea, *
Trustees; Contractors, Laborers, *
Teamsters and Engineers Health and *
Welfare Plan; Contractors, Laborers, *
Teamsters and Engineers Pension Plan; *
Tom Merksick, *
*
Plaintiffs - Appellants, *
*
Official Committee of Unsecured *
Creditors of MSGrading, Inc., *
*
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Creditor, *
*
v. *
*
*
First National Bank of Omaha, *
*
Defendant - Appellee, *
*
James Killips, Trustee for Debtor *
M & S Grading, Inc., *
*
Trustee - Appellee. *
*
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Submitted: June 13, 2008
Filed: September 9, 2008
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Before MELLOY, ARNOLD and BENTON, Circuit Judges.
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MELLOY, Circuit Judge.
This case arises out of the bankruptcy of M & S Grading, Inc. M & S, an
excavation company, participated in employee-benefit plans. The plans and their
trustees assert M & S’s bankruptcy trustee improperly made payments to First
National Bank of Omaha instead of making payments to the plans. The plans and
their trustees appeal various district-court judgments1 related to this dispute, and we
affirm.
1
The Honorable Timothy J. Mahoney, Chief Judge, United States District Court
for the District of Nebraska and The Honorable Lyle E. Strom, United States District
Judge for the District of Nebraska.
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I.
M & S was a participating employer in employee-benefit plans, specifically a
multi-employer health and welfare plan and a multi-employer pension plan. In 2002,
M & S filed for Chapter 11 bankruptcy. During M & S’s reorganization, the
bankruptcy court twice ordered the company to make timely contribution payments
to the plans. While M & S made some of the ordered payments, it did not make all
of them. When M & S converted to Chapter 7 bankruptcy in 2005, the company owed
the plans $117,500 in contribution payments and potentially additional payments for
interest and liquidated damages under ERISA.
M & S also owed money to the bank. Before M & S filed for bankruptcy, the
bank made several loans to M & S and a related company, Earl Brice Equipment
L.L.C. The bank obtained a perfected pre-petition security interest in M & S’s
inventory, accounts and other rights to payment, general intangibles, equipment, and
other collateral. During the reorganization, the bank received proceeds from M & S’s
accounts receivable.
The plans sought an order from the bankruptcy court requiring M & S’s Chapter
7 trustee, James Killips, to show cause why he should not be found in contempt for
failing to make contributions to the plans while M & S was in Chapter 11.2 The
bankruptcy court denied the motion, the district court dismissed the appeal concluding
that an order to show cause was not a final appealable order, and a panel of this court
dismissed for lack of jurisdiction. In re M & S Grading, Inc., 526 F.3d 363, 366 (8th
Cir. 2008).
2
Killips had been appointed Chapter 11 trustee on December 22, 2004. The
case was converted to a Chapter 7 proceeding in June 2005. Killips remained as the
Chapter 7 trustee.
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The present appeal is based on arguments that Killips should be removed as a
trustee or that the plans should be permitted to sue the bank on behalf of the
bankruptcy trustee and on arguments contesting a grant of summary judgment in favor
of the bank and M & S.
The bankruptcy court denied the plans’ motion for removal of Killips as
bankruptcy trustee. The bankruptcy court noted that in determining whether to
commence litigation against the bank, Killips, as “the trustee[,] . . . weigh[ed] the
merits of the action, the likelihood of success, the litigation costs, and the net benefit
to the estate.” The bankruptcy trustee exercised sound business judgment, consulted
with competent bankruptcy counsel, and declined to commence litigation because it
was likely to be unsuccessful. The district court also noted that the United States
Trustee and the Internal Revenue Service, another creditor who would benefit from
successful litigation, agreed. The bankruptcy court also rejected other grounds for
removal of the bankruptcy trustee, finding that there was nothing improper about
Killips’s actions regarding the bank, that late filing of operating reports was not an
adequate ground to remove a trustee, and that Killips did not have a conflict of
interest. Furthermore, the bankruptcy court noted that even if Killips were removed
as bankruptcy trustee and another trustee took every action the plans demanded, there
still would not have been funds available to distribute to the plans. The bankruptcy
court also denied the plans’ motion to commence litigation on behalf of the trustee.
The bankruptcy court noted that whether to file an action against a secured creditor
is “within the business discretion of the trustee.” The district court affirmed the
bankruptcy court’s denial of both these motions.
The bank filed a motion for partial summary judgment, which the bankruptcy
court granted, deciding the limited issue that the unpaid plan contributions were not
property of the plans. Specifically, the district court found that the unpaid
contributions were employer contributions, not employee contributions, and were thus
not plan assets. The district court affirmed, and the plans appeal.
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II.
“We sit as a second court of review in bankruptcy matters” and review the
bankruptcy court’s factual findings for clear error and its legal conclusions de novo.
M & S Grading, Inc., 526 F.3d at 367.
The plans raise several arguments in this appeal. They argue the unpaid
contributions owed to the plans are not subject to the bank’s priority interest. Second,
the plans argue the bankruptcy court abused its discretion by denying the plans’
motion to commence litigation against the bank to recover funds. Third, the plans
argue that equitable subordination should apply. Fourth, the plans argue that the
bankruptcy court abused its discretion in denying their motion to remove Killips as
the trustee without a hearing.
A.
The plans argue that the unpaid contributions owed to the plans were not
subject to the bank’s priority interest because they were assets of the plans, not of
M & S. The plans allege that the unpaid contributions were employee contributions,
not employer contributions, and that the unpaid contributions were plan assets because
M & S was twice ordered to make the plan contributions.
i.
The plans first assert the unpaid contributions were employee, not employer
contributions and were thus not part of M & S’s assets and not subject to the bank’s
priority interest. See Trs. of the Graphic Commc’ns Int’l Union Upper Midwest Local
1M Health and Welfare Plan v. Bjorkedal, 516 F.3d 719, 733 (8th Cir. 2008) (noting
that, for the purpose of determining fiduciary obligations, funds were assets of the
plans once the funds were withheld from employees’ paychecks, distinguishing
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employee contributions from employer-owned contributions, which are not plan
assets). Bjorkedal involved a determination of whether a corporate officer breached
his fiduciary duties to a plan, and the case is instructive because fiduciary duties attach
only when the officer is managing assets of the plan, as opposed to assets of the
corporation.
We hold in this case that the contributions were not employee contributions
because, as the parties agree, the contributions were not withheld from the employee
paychecks. See id. (noting that the funds not withheld from employees’ paychecks
were not plan assets). Employees did not directly make the plan contributions.
M & S was to make the contributions, meaning the unpaid contributions were
employer contributions. In making this determination, we recognize that when
M & S increased its employer contributions (due to factors such as increases in health
insurance premiums), it decreased employee wages by a like amount. We also
recognize that the collective bargaining agreement provided that “[a]ny difference in
contributions will be added to or deducted from the employees wages.” The net effect
was that the employees bore the burden of any increase in contributions over the
agreed-upon base contract amount. Despite the economic reality, however, neither the
base contributions nor the adjusted contributions were employee contributions
because they were not deducted from employees’ paychecks. See In re Popovich, 359
B.R. 799, 804 (Bankr. D. Colo. 2006) (distinguishing the economic reality from the
definition of employee funds under the ERISA definition of a fiduciary and noting
that “the fact that benefits are part of the ‘wage package’ does not make them the
employees’ funds”). As a matter of law, employees did not make the contributions,
so the contributions are not employee contributions.3
3
Because we conclude that the unpaid contributions are not plan assets, we do
not reach the bank’s alternative argument that the unpaid contributions belong to the
bank because the plans are unable to trace their claims to specific funds.
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ii.
The plans distinguish the instant case from Bjorkedal, a case where this court
held unpaid employer contributions were not plan assets for the purpose of
establishing whether an officer allegedly exercising discretionary authority over funds
had a fiduciary duty to the plans. 516 F.3d at 732. In Bjorkedal, we determined that
an officer was not personally liable for unpaid employer contributions because the
officer was not making a fiduciary decision and was not wearing a “fiduciary duty
hat” when he failed to make the payments. Id. at 732 (quotation omitted). This was
because the officer was managing assets of the business, not of the plan. The plans
argue that the instant case is different because M & S failed to follow two bankruptcy
court orders requiring it to contribute to the plans. We are not persuaded by this
distinction. While Bjorkedal did not involve a court-imposed obligation to contribute
to the plan, the company in Bjorkedal, like M & S, was legally obligated to make
contributions to the plan. Nevertheless, “[c]orporate assets do not become plan assets
merely because an employer has a corporate obligation to make payments to the plan.”
Id. We have thus held that “[a] corporate officer facing limited cash flow” can
“choose[] to pay corporate obligations in lieu of employer contributions to an ERISA
plan” without breaching a fiduciary duty to the plan because unpaid corporate
contributions are not assets of the plan. Id.; see also id. (citing In re Luna, 406 F.3d
1192, 1203 (10th Cir. 2005) as stating that “a contractual obligation to fund a plan is
not a . . . decision regarding . . . plan assets”). Likewise, when M & S failed to make
payments to the plans, the unpaid contributions remained corporate assets and did not
become assets of the plan.
The plans cite Armstrong v. Norwest Bank, Minn., N.A., 964 F.2d 797 (8th Cir.
1992), for the proposition that the orders requiring M & S to contribute to the plans
are binding on Killian, as the bankruptcy trustee. See id. at 801 (noting the trustee is
bound by acts of the debtor and by decisions of the court, even if the trustee was not
present at the proceedings). Armstrong, however, merely provides that Killian, as the
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bankruptcy trustee of M & S, cannot escape M & S’s obligations based on the fact that
he was not the trustee when M & S became obligated. As stated above, the issue in
this case is not whether M & S has an obligation to contribute to the plan, but whether
the unpaid contributions constitute plan assets. Armstrong is not instructive on this
point, and the plans’ reliance on it is misplaced.
B.
The plans assert the bankruptcy court abused its discretion by denying their
motion to commence litigation against the bank. Generally only trustees “may recover
from property securing an allowed secured claim the reasonable, necessary costs and
expenses of preserving . . . such property to the extent of any benefit to the holder of
such claim.” 11 U.S.C. § 506(c) (2006); see also Hartford Underwriters Ins. Co. v.
Union Planters Bank, N.A., 530 U.S. 1, 6 (2000) (interpreting § 506(c)). We have,
however, held that creditors may have derivative standing to pursue actions when a
bankruptcy trustee is “unable or unwilling to do so.” PW Enters. v. N.D. Racing
Comm’n (In re Racing Servs.), — F.3d —, —, 07-1821 (8th Cir. Aug. 29, 2008).
“[T]o establish derivative standing, a creditor must show: (1) it petitioned the trustee
to bring the claims and the trustee refused; (2) its claims are colorable; (3) it sought
permission from the bankruptcy court to initiate an adversary proceeding; and (4) the
trustee unjustifiably refused to pursue the claims.” Id. “To satisfy its burden, the
creditor, at a minimum, must provide the bankruptcy court with specific reasons why
it believes the trustee’s refusal is unjustified.” Id.
The bankruptcy court found the trustee decided not to pursue a claim after
carefully considering whether to assert a claim and concluded that doing so was not
in the best interests of the estate. The trustee’s decision not to assert a claim was not
because he was “unable or unwilling to do so.” Id. We find that the trustee’s failure
to assert a claim was justified and that the court did not abuse its discretion in denying
the plans’ motion to commence litigation against the bank.
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C.
The plans also argue the district court abused its discretion in not granting its
equitable subordination claim under 11 U.S.C. § 510(c). We review the bankruptcy
court’s failure to apply equitable subordination for abuse of discretion. In re Racing
Servs., Inc., 340 B.R. 73, 76 (B.A.P. 8th Cir. 2006). Equitable subordination would
be appropriate if the following three conditions were present: (1) the bank engaged in
inequitable conduct; (2) the misconduct injured the plans or resulted in the bank’s
unfair advantage; and (3) equitable subordination is not inconsistent with provisions
of the Bankruptcy Code. Id.
The plans argue the bank engaged in inequitable conduct by “gaining control
over Killips after he was appointed trustee” and that this control enabled the bank to
receive payments and assets despite a stay order and in the absence of an accounting.
The bankruptcy court determined that the plans did not carry their burden of
establishing a genuine issue of material fact as to the bank’s security interest, and we
find the court did not abuse its discretion in reaching this conclusion. We find no
evidence in the record of the bank gaining control over Killips. See Wegner v.
Grunewaldt, 821 F.2d 1317, 1323 (8th Cir. 1987) (noting that equitable subordination
requires fraudulent or inequitable activity). The bank had a validly perfected security
interest in all of M & S’s assets. The bank was in line to receive payments before the
plans, and the bank’s interest was not the result of inequitable conduct. Merely
receiving preferential transfers is not inequitable conduct, even if those receiving the
transfers are fiduciaries. Bergquist v. Anderson-Greenwood Aviation Corp. (In re
Bellanca Aircraft Corp.), 850 F.2d 1275, 1282 (8th Cir. 1988). “[W]e decline to hold
that receipt of a preference, without more, is the type of inequitable conduct that
warrants subordination of a claim.” Id.4
4
The bankruptcy court entered a number of cash collateral and other orders
during the Chapter 11 proceeding that recognized the bank’s validly perfected security
interest in all of M & S’s assets. The plans were a party to most, if not all, of those
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We therefore decline to address the final two prongs in the equitable
subordination claim. See Bellanca, 850 F.2d at 1282–83 (“Because the trustee has
failed to persuade us that the lower courts were wrong in finding that [the claimants]
did not engage in inequitable conduct, we find it unnecessary to address the two
remaining prongs of the equitable subordination inquiry.”).5
D.
The plans also appeal from the bankruptcy court’s denial of their motion to
remove Killips as the bankruptcy trustee. While the Bankruptcy Code provides that
a hearing is required before a trustee can be removed, 11 U.S.C. § 324(a) (2006) (“The
court, after notice and a hearing, may remove a trustee, other than the United States
trustee, or an examiner, for cause.”), the Code is silent on whether a hearing is
required before a court can deny a motion to remove a trustee. See id. The plans rely
on broad language from cases holding that a hearing is required before a trustee’s
removal See, e.g., In re Waller, 331 B.R. 489, 493 (Bankr. M.D. Ga. 2005) (“The
Court may only consider removal of a trustee after notice and a hearing. Therefore,
the Court will schedule a hearing date and order notice to be sent to all interested
parties.” (citation omitted)). The plans, however, have not cited to any case that holds
a bankruptcy court must hold a hearing before denying a motion to remove a trustee.
The bankruptcy court issued a detailed order denying the motion and addressing each
proceedings and never raised any objection to the validity of the bank’s security
interest.
5
We note that we have carved out an exception for tax penalty cases, holding
that wrongful or inequitable conduct is not necessary for equitable subordination.
Schultz Broadway Inn v. United States, 912 F.2d 230, 233 (8th Cir. 1990); see also
In re of Lifeschultz Fast Freight, 132 F.3d 339, 347–48 (7th Cir. 1997) (citing Shultz
Broadway Inn as an example of the tax-penalty exception to the rule that equitable
subordination requires wrongful or inequitable conduct). This exception is
inapplicable in the instant case.
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of the nine alleged causes for removal of the bankruptcy trustee. The plans do not
allege the bankruptcy court committed a factual error and do not indicate any evidence
the bankruptcy court would have considered had it held a hearing. Furthermore, the
record does not include evidence indicating the bankruptcy trustee should be removed.
The bankruptcy court found Killips used sound business judgment in evaluating
whether to litigate against the bank. The evidence does not suggest Killips should be
removed as a trustee, and we find that the bankruptcy court did not abuse its discretion
by denying the motion to remove him as a trustee without a hearing.
III.
We affirm.
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