Unpaid Multiemployer Plan Contributions not Dischargeable

July 16, 2013 (PLANSPONSOR.com) – A federal bankruptcy court ruled a plan fiduciary still owes contributions to multiemployer plans though he filed for bankruptcy.

U.S. Bankruptcy Judge William C. Hillman of the U.S. Bankruptcy Court for the District of Massachusetts noted in his decision that under the trust agreements for the Massachusetts Bricklayers and Masons Health and Welfare Fund, Pension Fund and Annuity Fund, unpaid contributions that are due and owing are assets of the funds. According to the opinion, James M. Fahey Jr., president, treasurer and sole shareholder of Zani Tile Co. did not dispute that he was aware of his obligations to the funds, but failed to remit the contributions.

Hillman said the undisputed facts of the case indicate that Fahey instead prioritized the payment of corporate expenses that were beneficial to him, such as a bank loan that he personally guaranteed and his personal loan to Zani, over his obligations to the funds. “In so doing, he violated the duty of loyalty to the beneficiaries of the funds. Therefore, I find that the debtor committed a defalcation within the meaning of 11 U.S.C. § 523(a)(4),” Hillman wrote in the opinion.

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Section 523(a)(4) of the Bankruptcy Code excepts from discharge debts for “defalcation while acting in a fiduciary capacity.” Hillman relied on a U.S. Supreme Court decision in Bullock v. BankChampaign, N.A., in which the high court clarified that “where 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. … 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.”

According to Hillman’s opinion, as Zani’s “sole decisionmaker,” Fahey was in charge of day-to-day operations and was responsible for the company’s book-keeping, including payment of Zani’s bills. Zani was timely in its payment of contributions to the multiemployer plans until November 2008, at which time payments became consistently late. In March 2009, Zani ceased making payments altogether.

Fahey filed his voluntary Chapter 7 petition on January 21, 2011. He listed the multiemployer plan trustee’s claim on “Schedule F – Creditors Holding Unsecured Nonpriority Claims,” assigning it an approximate value of $200,000. On April 12, 2011, the trustee filed a complaint seeking to establish the nondischargeability of all unpaid deductions and contributions.

The opinion for In Re: James M. Fahey, Jr., Debtor is here.

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