Contractor Owing Withdrawal Liability Not a Fiduciary

September 19, 2013 ( – The 9th U.S. Circuit Court of Appeals has ruled that withdrawal liability owed by a contractor to a multiemployer pension fund is dischargeable in bankruptcy.

The appellate court agreed with a lower court decision that the pension fund cannot establish that the debtor is a fiduciary with respect to money it owes as withdrawal liability. The court found Michael G. Moxley, who did business as MGM’s Cabinet Installation Service, did not have anything to do with the administration or investment policy of the plan, and did not exercise control over fund assets because the withdrawal liability is not a fund asset.

The fund argued that the liability was considered a fund asset based on a multiemployer bargaining agreemeent defining the plan assets to include “all contributions required . . . to be made” to the fund. The court noted that the Bankruptcy Code requires a fiduciary relationship to exist before the bad act of nonpayment, rather than as a result of it. For an employer, withdrawal liability does not arise until the “employer ceases to have an obligation to contribute under the plan,” and the employer “continues to perform work in the jurisdiction of the collective bargaining agreement of the type for which contributions were previously required.” Because withdrawal liability does not arise until the employer ceases to have an obligation to contribute to the plan, it cannot be considered an unpaid contribution under the collective bargaining agreement.

In 1999, Moxley became a signatory to the multiemployer bargaining agreement titled “The 46 Northern California Counties Carpenter’s Master Agreement of Northern California,” and was required under the agreement to make contributions to the Carpenters Pension Trust Fund for Northern California. When the agreement expired in June 2004, he was no longer a signatory to a collective bargaining agreement, and stopped making payments to the fund.

In March 2005, the fund notified Moxley that because he was still doing work covered by the agreement, he was subject to withdrawal liability under the Employee Retirement Income Security Act (ERISA) in the amount of $172,045. The fund filed suit in the United States District Court for the Northern District of California, but proceedings there were stayed when Moxley filed for bankruptcy.

In the bankruptcy court, Moxley sought a discharge of his debt to the fund, and the fund sought to establish that the debt qualified as one created via defalcation by a fiduciary under U.S. Code § 523(a)(4). It provides that a bankruptcy discharge “does not discharge an individual debtor from any debt . . . for fraud or defalcation while acting in a fiduciary capacity . . . .” In order to prevent the discharge, the fund had to establish both that Moxley was acting in a fiduciary capacity with respect to the money he had not paid to the fund, and that the failure to pay constituted “defalcation” within the meaning of the Code. The appellate court said it did not need to reach the issue of defalcation, because it determined Moxley was not a fiduciary.

The appellate court also rejected the fund’s assertion that Moxley waived his right to a discharge of his withdrawal liability because he failed to challenge the amount or existence of the liability in arbitration. The Multiemployer Pension Plan Amendments Act states that all disputes over withdrawal liability must be arbitrated. The court noted the arbitration provision of ERISA expressly applies where an employer contests the existence or the amount of an alleged liability, and Moxley does not dispute the amount or existence of the withdrawal liability.

The 9th Circuit’s opinion is here.