Employer’s withdrawal liability was dischargeable in bankruptcy because it did not qualify as debt created via fiduciary “defalcation”

An employer’s withdrawal liability was dischargeable in bankruptcy because it did not qualify as a debt created via defalcation by a fiduciary under the U.S. Bankruptcy Code, according to the U.S. Court of Appeals at San Francisco (CA-9).

In 1999, the debtor, a carpenter, became a signatory to a multiemployer bargaining agreement which required him to make contributions to a union pension fund. When the agreement expired in June 2004, he was no longer a signatory to the collective bargaining agreement. He stopped making payments to the fund, but continued doing carpentry work in the area. In March 2005, the fund notified the debtor that because he was still doing work covered by the agreement, he was subject to withdrawal liability under ERISA §4201. The fund filed suit in district court, but proceedings there were stayed when the debtor filed for bankruptcy.

In the bankruptcy court, the debtor sought a discharge of his debt to the fund. The fund sought to prevent discharge by claiming that the debt qualified as one created via defalcation by a fiduciary under Sec. 523(a)(4) of the U.S. Bankruptcy Code. This section provides that a bankruptcy discharge “does not discharge an individual debtor from any debt . . . for fraud or defalcation while acting in a fiduciary capacity . . . .” The bankruptcy court held that the debtor was not a fiduciary with respect to the debt he owed the fund and therefore the debt was dischargeable in bankruptcy. The district court affirmed.

On appeal, the fund argued that the debtor did not become a fiduciary as a result of his failure to pay this debt, but instead has been a fiduciary with respect to all the contributions he was ever required to pay in to the fund, including withdrawal liability. This contention was grounded in the language of the collective bargaining agreement defining the plan assets to include “all contributions required . . . to be made” to the fund. The appellate court, however, noted that withdrawal liability was a statutory obligation and was different from unpaid contributions arising from contractual obligations under the collective bargaining agreement.

Accordingly, the court said, even assuming that unpaid contributions can be considered assets of the fund under the particular provisions of this agreement, the withdrawal liability is not an unpaid contribution. The court therefore affirmed the conclusion of both the bankruptcy and district court that the withdrawal liability was dischargeable.

Source: Carpenters Pension Trust Fund for Northern California v. Moxley (CA-9).

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.