U.S. Department of Labor v. Harris (In re Harris)

Case Type:
Consumer
Case Status:
Affirmed
Citation:
16-6024 (8th Circuit, Jan 06,2017) Not Published
Tag(s):
Ruling:

Concluding that the facts relevant to the inquiry were undisputed, the BAP affirmed the bankruptcy court's decision declaring the Department of Labor's judgment against the debtor for failure to remit ermployee funds withheld for insurance premiums was a debt arising from defalcation while acting in a fiduciary capacity within the meaning of 11 U.S.C. § 523(a)(4) and therefore nondischargeable.

Procedural context:

Prior to the bankruptcy filing, the Department of Labor (DOL) obtained a judgment against the CEO of a company who failed to remit funds withheld from employee paychecks for their health insurance plan.  The CEO subsequently filed bankruptcy, and the DOL sought to have its judgment debt declared nondischargeable under 11 U.S.C. § 523(a)(4).  The bankruptcy court gave collateral estoppel effect to the findings of the district court that (i) the funds withheld from the employee paychecks constituted a trust res, and (ii) the CEO was a fiduciary as to those funds, and concluded that the CEO's fiduciary duty under ERISA satisfied the requirements of § 523(a)(4).  Concluding that the CEO had the requisite intent to constitute "defalcation," the bankruptcy court granted summary judgment in favor of the DOL.

Facts:

The CEO's company withheld employees' health insurance premiums from the employees' paychecks.  The funds were held in the company's general operating account, and the CEO (among others) had signatory authority on the account and was responsible for remitting funds to the insurance provider.  In 2008 and 2009, the company's payments to the insurer bounced multiple times and, in March 2009, the CEO asked for an extension of time to pay the then-late January and February payments.  Although the company had sufficient funds on hand at that time to pay the insurance premiums, the CEO made the deliberate decision to pay other expenses instead, including other company creditors and the CEO's personal home equity line of credit.  On these facts, the bankruptcy concluded that the funds were held in trust, and that the CEO owed a fiduciary duty to the employees with respect to those funds.  The court distinguished the facts from cases where a company was contractually obligated to make payments on behalf of employees, noting that in such cases no trust is created because the funds had not been withheld from employee wages.  On the final issue of defalcation, the court cited the Supreme Court's recent decision in Bullock v. Bankchampaign, concluding that the CEO's acts constituted an intentional misappropriation of funds.    

Judge(s):
Federman, Saladino, and Nail.

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