U.S. Department of Labor v. Harris

Case Type:
Case Status:
17-1261 (8th Circuit, Aug 03,2018) Published
Eight Circuit affirmed the judgment of the bankruptcy court finding debt owed to the Department of Labor (DOL) was non-dischargeable under 11 U.S.C. Section 523(a)(4), which excepts from discharge any debt “for fraud or defalcation while acting in a fiduciary capacity.” Chapter 7 debtor breached his fiduciary duty when he failed to remit funds withheld from employee paychecks for health insurance, and when he improperly used ERISA plan assets to pay personal and corporate expenses. Fiduciary relationship preexisted the debt because debtor exercised control over the funds before defalcation.
Procedural context:
Appeal to the Eight Circuit from BAP, which upheld bankruptcy court ruling debt was not dischargeable under § 523(a)(4).
Debtor was the CEO and Chairman of the Board of a blanket manufacturer. Manufacturer contracted with HealthPartners to sponsor health insurance to its employees. Funds were withheld from paychecks and remitted to HealthPartners. Account was often past due and numerous checks were returned with insufficient funds. HealthPartners canceled the plan and manufacturer failed to remit about $55,040 withheld from paychecks from a period of two months. Debtor at all material times had control over the funds and used them to pay himself and other corporate expenses. Approximately two years later, DOL sued the debtor in district court and obtained a judgment for the unremitted funds. Debtor sought Chapter 7 relief on November 23, 2015. DOL then filed an adversary proceeding arguing collateral estoppel prevented relitigation of determinations made in the district court’s lawsuit, and that the debt was not dischargeable under § 523(a)(4). The bankruptcy court granted summary judgment for DOL and BAP affirmed.

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