Every month, the International Foundation releases the Legal and Legislative Reporter, a compilation of new employee benefits-related case summaries. Below is a summary we thought you’d be interested in. Content provided by Morgan, Lewis & Bockius LLP.

The U.S. District Court for the Middle District of Florida reverses the bankruptcy court’s decision, finding that it erred in determining that the defendant did not act as a fiduciary with respect to employee benefit plans.

The plaintiffs include employee benefit, pension and medical plans. The defendant is a business owner and party to a collective bargaining agreement (CBA) that requires contributions to the plans. The plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA).

The defendant and his business partner signed letters of assent with local unions, obligating their company to contribute to the plans for union members who performed work for their company. A few years after signing the CBA, the company failed to make required contributions to the plans. The defendant’s business partner-initiated payment for a portion of the past due contributions; however, the defendant stopped the electronic transfer, and the money never left the company’s bank.

Shortly thereafter, the defendant took money from the company account and transferred it to his personal account. The defendant then filed for bankruptcy. In response, the plaintiffs filed an adversary proceeding, alleging that the payments to the plans were a nondischargeable debt for which the defendant is liable. The defendant brought a motion for summary judgment against the plaintiffs, which the bankruptcy court granted because it found that the defendant was not acting as a fiduciary over the assets of the plans. The required contributions were never actually transferred from the defendant’s company to the plans, but instead he was acting in his individual capacity when he withdrew money from the company account and deposited it in his personal account. The plaintiffs then appealed the bankruptcy court’s grant of summary judgment, arguing that the court erred when it granted the defendant’s summary judgment motion because he was acting as a fiduciary.

Debts are generally discharged in bankruptcy; however, one exception to that is for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny. The court finds that the plaintiff does not argue that the defendant took the money by fraud, embezzlement, or larceny. Therefore, the court finds that to succeed on this claim, the plaintiffs must establish that the defendant was acting in a fiduciary capacity and that his removal of the payments from the plans was a defalcation. The court finds that prior to the bankruptcy proceedings, the plaintiffs did not contend that the plans’ declaration of trust made the defendant a fiduciary under ERISA. According to the defendant, he could only be an ERISA fiduciary if he administered the plans or was an officer of the plans. Although the defendant is an administrator of the plans, the payments never left the company’s bank account or became an asset of the plans.

Under ERISA, fiduciary status is functional—a person is a fiduciary to the extent that they exercise any discretionary authority or discretionary control over the management of the plans or the management and disposition of the plans’ assets. Generally, unpaid employer contributions to plans do not constitute plan assets; however, when the agreement between the plan and the employer specifically calls for it, the past due contributions will constitute plan assets.

The court finds that in the declaration of trust, the company agreed, through the CBAs, that the required contributions were part of the trust estate, regardless of whether they were collected. Consequently, the court finds that because the defendant exercised control over the past due contributions, he is a fiduciary under ERISA. Additionally, the court finds that the bankruptcy court erred when it determined that the only way the payments became plan assets was if they entered into the plaintiff’s bank account.

After determining that the defendant is a functional fiduciary, the court considers whether the defendant was acting in a fiduciary capacity when transferring the payments. The court finds that the circuit in which it sits typically uses a three-part test to determine whether a debtor acted in a fiduciary capacity based on a fiduciary relationship created by a contract or statute.

This test requires that (1) the fiduciary relationship have a trustee, who holds an identifiable trust res, for the benefit of an identifiable beneficiary, (2) a contract or statute must define sufficient trust-like duties imposed on the trustee, the most important being the duty to segregate trust assets and the duty to refrain from using trust assets for a non-trust purpose and (3) the fiduciary relationship must exist before the act of fraud or defalcation and cannot arise from the act.

The court finds that the defendant’s ERISA functional fiduciary status survives this test because the three required elements are met. The defendant is an identifiable trustee over the plans, the beneficiaries are the employees who benefit from the plans, and the rest are the unpaid contributions controlled by the defendant. Second, under ERISA, the segregation of funds is not required for a deemed fiduciary.

Lastly, the court finds that the defendant committed defalcation when he moved the payments from the company account to his personal account. The court finds that although defalcation refers to a failure to produce funds, it does not necessarily rise to the level of fraud, embezzlement, or misappropriation. Nonetheless, the court finds that because the bankruptcy court did not analyze the defendant’s actions in the context of fiduciary capacity and whether he committed defalcation, the court remands this element to the bankruptcy court.

Accordingly, the court finds that the bankruptcy court erred in determining that the defendant did not act as a fiduciary with respect to the plans and remands the case to the bankruptcy court to determine whether the defendant’s actions constituted defalcation.

Thrower, et. al v. Godwin, No. 8:20-bk-4446-CPM (M.D. Fl., March 31, 2023).

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