Bankruptcy Judge Deals Blow to Union Benefit Funds

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By Jacklyn Wille

Dec. 11 — The owner of a now-defunct sheet metal company can avoid paying nearly $1.4 million in union benefit fund contributions by filing for bankruptcy, a federal bankruptcy court ruled.

The payment can be avoided because the missed contributions were caused by the company's struggles to stay afloat, rather than by any intentional wrongdoing by the owner, Bankruptcy Judge Alan S. Trust of the U.S. Bankruptcy Court for the Eastern District of New York explained in a Dec. 10 opinion.

The court's decision centered on the U.S. Bankruptcy Code's defalcation exception, which bars fiduciaries from discharging debts incurred through fraudulent conduct. In 2013, the U.S. Supreme Court made it easier for fiduciaries to erase their debts through bankruptcy by ruling that defalcation requires a culpable state of mind (Bullock v. BankChampaign, N.A., 133 S.Ct. 1754 (U.S. 2013).

Looking to the Supreme Court's Bullock ruling, Trust said the owner of Cool Sheetmetal Inc. could avoid his $1.4 million debts to the union benefit funds because he didn't incur the debts through any wrongful conduct.

Trust said the “ultimate issue” in the case concerned the owner's conduct, but he also made a significant ruling about the owner's status as a fiduciary.

Specifically, Trust said that because the owner had authority over making contributions to the union benefit funds, he was a fiduciary under both the Employee Retirement Income Security Act and the Bankruptcy Code's defalcation exception.

The federal circuit courts have disagreed about whether an ERISA fiduciary automatically qualifies as a fiduciary under the Bankruptcy Code. The First and Ninth circuits have held that “functional” fiduciaries under ERISA also qualify as fiduciaries under the Bankruptcy Code, while the Sixth and Eighth circuits have disagreed.

In this case, Trust said he saw “no compelling reason to hold that an ERISA fiduciary is not a per se fiduciary” under the Bankruptcy Code's defalcation exception.

The company owner was represented by Berger, Fischoff & Shumer LLP. The union benefit funds were represented by Jeffrey S. Dubin and Amy E. Lucas-Strang.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bna.com

To contact the editor responsible for this story: Phil Kushin at pkushin@bna.com

Text of the opinion is at http://www.bloomberglaw.com/public/document/In_re_Richard_Kern_Debtor_Sheet_Metal_Workers_National_Pension_Fu.