Source: http://zalma.com/blog/using-erisa-plan-benefits-for-paying-business-debts-wrongful/
Timestamp: 2019-04-24 02:05:40+00:00

Document:
The United States Department of Labor (DOL) obtained a pre-bankruptcy judgment against debtor Michael Harris in federal district court. The judgment provided that, under the Employee Retirement Income Security Act of 1974 (ERISA), Harris breached his fiduciary duty when the company he managed as the chief executive officer (CEO) failed to remit funds withheld from its employees’ paychecks for their health insurance plan. The DOL filed an adversary proceeding in Harris’s Chapter 7 bankruptcy to have that judgment debt declared nondischargeable as a debt for defalcation while acting in a fiduciary capacity under 11 U.S.C. § 523(a)(4). The bankruptcy court granted summary judgment in the DOL’s favor, declaring the debt nondischargeable.
In In re: Michael P. Harris, As surety for Faribault Mills Inc., As surety for Faribault Woolen Mill Company Debtor, U.S. Department of Labor Appellee v. Michael P. Harris, No. 17-1261, United States Court of Appeals For the Eighth Circuit (August 3, 2018) Harris appealed the findings and claimed he could discharge the debt owed to the DOL.
In 2001, Harris became CEO, President, and Chairman of the Board of Directors of Faribault Woolen Mills Company (“Faribault”), a blanket manufacturer. He owned 0.3 percent or less of Faribault’s outstanding stock and had common options.
Faribault sponsored the Faribault Woolen Mills, Inc. Fully Insured Hospital Life Welfare Plan (“Plan”) to provide health insurance for its employees. The Plan contracted with HealthPartners Health Insurance Company (“HealthPartners”) to provide healthcare benefits for Plan participants. Employee contributions funded 100 percent of the health insurance premiums. The premiums were due to HealthPartners on the first of every month to provide insurance coverage for that month. Faribault withheld the health insurance premiums from the employee-participants’ paychecks and then remitted the amount owed to HealthPartners from its general operations account on the first of each month. (Faribault also paid its general corporate expenditures from the same general operations account.) Harris knew that the payments were due monthly.
On at least two occasions in 2008—January 29 and November 26—Faribault issued checks to HealthPartners that Harris had signed that were subsequently returned by Faribault’s bank to HealthPartners due to insufficient funds. Following the return of those checks, Faribault ultimately remitted payment of the insurance premiums to HealthPartners without loss of Plan insurance coverage.
Faribault issued a check on January 27, 2009, signed by Harris, to HealthPartners for $22,593.02 to pay Plan premiums owed for January 2009. That check also bounced. In a letter dated February 28, 2009, HealthPartners advised it would cancel the Plan if Faribault did not pay in full.
Meanwhile, on February 27, 2009, Faribault issued a check that Harris signed to HealthPartners for $19,466.91 to pay the February 2009 Plan premiums. HealthPartners returned the February 27 check to Faribault. In an accompanying letter dated March 3, 2009, HealthPartners informed Dorr, Faribault’s CFO, that it would accept only wire payments due to Faribault’s prior insufficient-funds checks.
When Faribault did not remit the overdue payments, HealthPartners canceled the Plan’s insurance policy on April 1, 2009, retroactive to January 31, 2009, due to non-payment of premiums. Faribault thus never remitted $55,040.61 withheld from its employees’ paychecks for insurance premiums from January 9, 2009, to March 20, 2009. Also, from January to March 2009, Faribault issued checks to other creditors from the general operations account containing commingled Plan premiums.
On December 12, 2012, the DOL filed a complaint against Harris in federal district court, alleging that he violated ERISA. Specifically, the DOL asserted Harris failed to remit the $55,040.61 in withheld employee earnings to pay for the Plan’s healthcare premiums to HealthPartners. The DOL alleged that Harris’s failure to use the employees’ withheld wages to pay the HealthPartners premium breached his duty of loyalty to the Plan participants, in violation of ERISA § 404(a)(1)(A), 29 U.S.C. § 1104(a)(1)(A).
The district court determined that Harris’s fiduciary breach caused the $55,040.61 in losses that the Plan suffered. The court characterized the evidence as showing “that an amount of money significantly higher than the amount of premiums that was due to HealthPartners was removed from the account from which premiums were paid and was neither paid to HealthPartners nor returned to the employees, but instead was used to pay other corporate expenses or debts.” The district court found Harris liable to the Plan for $55,040.61 in restitution and, with prejudgment interest, awarded a total of $67,839.60. Harris did not appeal.
Harris sought bankruptcy to avoid the debt to the DOL who then filed an adversary proceeding in Harris’s Chapter 7 bankruptcy to have the judgment debt declared nondischargeable. The DOL wanted Harris’s debt to be considered the result of defalcation while acting in a fiduciary capacity under 11 U.S.C. § 523(a)(4).
The DOL moved for summary judgment, arguing that (1) the collateral-estoppel doctrine gave preclusive effect in the bankruptcy case to the district court’s factual and legal determinations, and (2) Harris’s debt was nondischargeable because it arose from “defalcation while acting in a fiduciary capacity” based on those factual and legal determinations.
The bankruptcy court granted summary judgment in the DOL’s favor, declaring the debt nondischargeable.
The bankruptcy court thus held that Harris’s ERISA judgment debt was nondischargeable under § 523(a)(4).
The BAP determined that Harris committed defalcation as to the Plan funds based on the undisputed facts. Specifically, the BAP concluded that Harris acted either intentionally or with gross recklessness under § 523(a)(4).
Harris’ failure to offer a justifiable reason for his decision not to use the remaining funds for the benefit of the employees for whom they were held in trust, the BAP held that the Bankruptcy Court properly concluded that there was no genuine issue of material fact as to his intent, and that DOL was entitled to judgment as a matter of law.
Harris argued that, based on the undisputed facts, he was not acting in a fiduciary capacity under § 523(a)(4) when the alleged defalcation occurred.
The stipulated facts, as well as the unchallenged facts found by the district court, show that Harris exercised control over Plan assets before he diverted any employee contributions; therefore, the fiduciary relationship preexisted the debt.
Accordingly,the appellate court affirmed the bankruptcy court’s conclusion that Harris had fiduciary obligations regarding the funds that had been withheld from wages for payment to HealthPartners.
Harris knew he had an obligation to remit the withheld employee contributions to HealthPartners but instead chose to prioritize payments of corporate expenses and creditors, including payments on his own personal line of credit.
Harris misused the Plan’s assets for his own and Faribault’s purposes. Harris committed defalcation in late March 2009 when he chose to use plan assets to pay himself and other corporate expenses instead of remitting those assets to HealthPartners.
What Harris did as an ERISA fiduciary was evil. He took money from his employees, held it for his own purposes, paid company bills with it, and then, with utmost “chutzpah” sought to discharge the debt with bankruptcy. It is amazing to me that the court did not refer him to the Department of Justice for prosecution of his act of theft and defalcation of funds belonging to the ERISA Plan.

References: § 523
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 § 404
 § 1104
 § 523
 § 523
 § 523
 § 523