07-3206- BK (L);07-3234- BK (CON)
I N R E : W ILLIAM C. H ALPIN J R .
1 UNITED STATES COURT OF APPEALS
2 FOR THE SECOND CIRCUIT
3 _____________________
4
5 August Term, 2008
6
7 (Argued: October 10, 2008 Decided: May 11, 2009)
8
9 Docket No. 07-3206-bk (L); 07-3234-bk (CON)
10
11 IN RE : WILLIAM C. HALPIN , JR.
12 _____________________
13
14 DONALD RAHM , LAWRENCE SPRARAGEN , JOSEPH GROSS, PHILIP PACIFICO , VINCENT J. DALEY ,
15 DONALD HART ,
16 Plaintiffs-Appellants,
17
18 — v .—
19
20 WILLIAM C. HALPIN , JR.,
21 Debtor-Appellee.
22
23 ___________________
24
25 Before: B.D. PARKER, LIVINGSTON , Circuit Judges, CHIN , District Judge.*
26
27 ___________________
28
29 Appeal from a judgment of the United States District Court for the Northern District of
30 New York (Kahn, J.) holding that because the debtor’s unpaid contributions to the funds are not
31 “assets” under 29 U.S.C. § 1002(21)(A), its principal was not a fiduciary over those funds and
32 therefore could not be held personally liable for their non-payment. AFFIRMED.
33 ___________________
34
35 WILLIAM POZEFSKY , Pozefsky, Bramley & Murphy, Albany,
36 NY, for Plaintiffs-Appellants.
37
38 BRIAN P. ROHAN , Rohan & Associates, Albany, NY, for
39 Debtor-Appellee.
* The Honorable Denny Chin, of the United States District Court for the Southern District
of New York, sitting by designation.
1 GREGORY F. JACOB, TIMOTHY D. HAUSER, NATHANIEL I.
2 SPILLER, & BRUCE C. CANETTI, United States
3 Department of Labor, Amicus Curiae in Response to
4 the Court’s Request.
5
6 ___________________
7
8 BARRINGTON D. PARKER, Circuit Judge:
9 This appeal presents a question of law: when do an employer=s contributions to an
10 employee benefit plan become “assets” under ERISA -- when the contributions become due, or
11 only after they are paid? We hold that, in the absence of provisions to the contrary in the relevant
12 plan documents, unpaid contributions are not assets of the plan.
13 BACKGROUND
14 The relevant facts are undisputed. Debtor-Appellee William C. Halpin, Jr. was the
15 President and sole shareholder of Halpin Mechanical & Electrical, Inc. (AHM&E@), an electrical
16 contracting business. HM&E entered into a collective bargaining agreement and several
17 subsidiary, plan-specific agreements (collectively, the “Plan Documents”) with the International
18 Brotherhood of Electrical Workers that required HM&E and its employees to contribute to various
19 ERISA pension and benefit funds (“the Funds” or “plans”). The plans provide Union members
20 with retirement income, apprenticeship training programs, health care, and other employee
21 welfare benefits. Halpin himself was a participant.
22 Over time, HM&E failed to make employer contributions to the Funds as required by the
23 Plan Documents.1 During the same period, however, HM&E continued to pay Halpin’s salary and
1
HM&E also failed to remit to the plans contributions that had been withheld from the
wages of HM&E’s employees. As Halpin and Plaintiffs-Appellants have reached a separate
agreement regarding those contributions, however, HM&E’s failure to remit these monies is not
before us.
2
1 other corporate debts. Eventually, both Halpin and HM&E filed for protection under Chapter 7 of
2 the Bankruptcy Code and sought to be discharged from debts that included the unpaid
3 contributions.
4 During bankruptcy proceedings, Plaintiffs-Appellants, the trustees of the Funds, moved
5 to have the debt for the delinquent employer contributions deemed non-dischargeable. The
6 trustees contended that the unpaid employer contributions were plan assets, and that Halpin had
7 exercised sufficient authority over them to have become a fiduciary under ERISA. See 29 U.S.C.
8 § 1002(21)(A). They alleged that Halpin had breached his fiduciary obligations to the Funds by
9 causing HM&E to pay other creditors while failing to make the required employer contributions to
10 the Funds. According to the trustees, this conduct violated 29 U.S.C. § 1104(a)(1), which requires
11 that a plan fiduciary “discharge his duties . . . solely in the interest of the [plan’s] participants and
12 beneficiaries.” They therefore asserted that Halpin is personally liable for any losses to the plan
13 resulting from this conduct. See 29 U.S.C. § 1109(a) (“Any person who is a fiduciary with respect
14 to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries
15 . . . shall be personally liable to make good to such plan any losses to the plan resulting from each
16 such breach . . . .”). Moreover, they contended that any resulting liability could not be discharged
17 in bankruptcy pursuant to ' 523(a)(4) of the Bankruptcy Code, which bars the discharge of debts
18 arising from “fraud or defalcation while acting in a fiduciary capacity.” 11 U.S.C. § 523(a)(4).
19 In response, Halpin took the position that, because the unpaid employer contributions were not
20 plan assets, he was not a fiduciary and consequently did not violate § 1104(a)(1). Accordingly, he
21 claimed that he was not personally liable under § 1109(a) and that there was no debt to discharge.
22 The Bankruptcy Court denied the trustees’ motion and the District Court affirmed,
3
1 concluding that the delinquent employer contributions were not plan assets and that Halpin was
2 not a fiduciary. See In re Halpin, 370 B.R. 45, 48-50 (N.D.N.Y. 2007). The District Court,
3 relying on the Plan Documents, found no indication that the unpaid employer contributions
4 became assets of the plan before actually being paid to the plan. In the District Court’s view, the
5 governing documents did not give the plan a property interest in funds still held by the company,
6 and consequently, the unpaid employer contributions were contractually due payments, not plan
7 assets. Id. at 48-49. The District Court thus concluded that Halpin’s failure to make the required
8 contributions did not constitute a breach of a fiduciary duty as Halpin was not a plan fiduciary
9 with regard to those contributions and that Halpin was therefore not personally liable for any loss
10 resulting from his conduct. This appeal followed, and we affirm.
11 DISCUSSION
12 Under ERISA, “a person is a fiduciary with respect to a plan to the extent . . . he exercises
13 any discretionary authority or discretionary control respecting management of such plan or
14 exercises any authority or control respecting management or disposition of its assets.” 29 U.S.C.
15 ' 1002(21)(A). Therefore, to establish non-dischargeability under ' 523(a)(4) the trustees must
16 first show both that (1) the unpaid contributions were plan assets and (2) Halpin exercised a level
17 of control over those assets sufficient to make him a fiduciary. We conclude that the unpaid
18 contributions are not plan assets, and accordingly, we need not address the second part of this test.
19 As a question of law, we review de novo the issue of when unpaid contributions become
20 assets under ERISA. See Robert Lewis Rosen Assocs. Ltd. v. Webb, 473 F.3d 498, 503 (2d Cir.
21 2007). ERISA itself does not define “assets.” See John Hancock Mut. Life Ins. Co. v. Harris
22 Trust & Sav. Bank, 510 U.S. 86, 89 (1993). Although the Department of Labor (“the
4
1 Department”), the agency charged with administering and enforcing Title I of ERISA, has
2 officially issued a regulation that specifies when employee contributions become assets, see 29
3 C.F.R. § 2510.3–102, it has not issued a formal rule governing when employer contributions
4 become plan assets.
5 In the absence of a formal rule or regulation, the Department has informally advised that
6 “the assets of a plan generally are to be identified on the basis of ordinary notions of property
7 rights under non-ERISA law.” U.S. Dep’t of Labor, Advisory Op. No. 93-14A (May 5, 1993).
8 Assets will “include any property, tangible or intangible, in which the plan has a beneficial
9 ownership interest,” considering “any contract or other legal instrument involving the plan, as
10 well as the actions and representations of the parties involved.” Id. Applying this reasoning, the
11 Department has taken the position through various informal agency pronouncements that
12 “employer contributions become an asset of the plan only when the contribution has been made.”
13 Employee Benefits Sec. Admin., U.S. Dep’t of Labor, Field Assistance Bulletin 2008-1, at 1-2
14 (Feb. 1, 2008); see also U.S. Dep’t of Labor, Advisory Op. No. 93-14A (May 5, 1993); U.S. Dep’t
15 of Labor, Advisory Op. No. 2005-08A (May 11, 2005). “However, when an employer fails to
16 make a required contribution to a plan in accordance with the plan documents, the plan has a
17 claim against the employer for the contribution, and that claim is an asset of the plan.” Employee
18 Benefits Sec. Admin., U.S. Dep’t of Labor, Field Assistance Bulletin 2008-1, at 2 (Feb. 1, 2008).
19 The Department’s position is reflected in its procedures for enforcing ERISA as outlined
20 in its amicus brief. When an employer misappropriates contributions that the employee has made
21 to ERISA funds, the Secretary sues the employer directly. In contrast, when an employer fails to
22 pay contributions, and the plan’s fiduciaries do not pursue the claim, the Secretary typically sues
5
1 the fiduciaries for failing to enforce the plan’s rights. Dep’t of Labor Br. 14-15. In these cases,
2 the Department’s position is that the employer’s failure to pay its contributions does not constitute
3 a breach of fiduciary duty, and the Department lacks the authority to sue the employer directly.
4 We agree with the Department’s interpretation that employer contributions become assets
5 only after being paid.2 Under “ordinary notions of property rights,” if a debtor fails to meet its
6 contractual obligations to a creditor, the creditor does not automatically own a share in the
7 debtor’s assets. The creditor, rather, has a “chose in action,” an assignable contractual right to
8 collect the funds owed by the debtor. See Mexican Nat’l R.R. Co. v. Davidson, 157 U.S. 201, 206
9 (1895). As one treatise explains, “[t]he terms ‘choses in actions’ and ‘debts’ are used by courts to
10 represent the same thing when viewed from opposite sides. The chose in action is the right of the
11 creditor to be paid, while the debt is the obligation of the debtor to pay.” 63C Am. Jur. 2d
12 Property § 22 (2008). Accordingly, the unpaid amounts are debts; they are not assets held in trust
13 for the benefit of the creditor.
14 Trust law similarly supports this analysis. Cf. Firestone Tire & Rubber Co. v. Bruch,
15 489 U.S. 101, 110-11 (1989) (directing courts to consider trust law when “develop[ing] a federal
16 common law of rights and obligations under ERISA-regulated plans.” (internal quotation marks
17 omitted)). Under well-settled principles of trust law, a debtor-creditor relationship is not a
18 fiduciary relationship. See Restatement (Third) of Trusts § 5(k) & cmt. k (indicating that the
19 relationship of a debtor to a creditor is not fiduciary in nature; rather the creditor has a personal
2
Although our own caselaw independently supports this conclusion, we agree with the
Department that its position is owed Skidmore deference. See Skidmore v. Swift & Co., 323 U.S.
134 (1944); see also Kalda v. Sioux Valley Physician Partners, Inc., 481 F.3d 639, 647 (8th Cir.
2007) (concluding that the “Secretary [of Labor]’s reasoning in its rulings regarding ‘plan assets’
[is] thorough, valid and particularly consistent”).
6
1 claim against the debtor); see also id. at § 5(i) & cmt. i (stating that a contract to convey
2 property does not give rise to a fiduciary relationship). Indeed, the Restatement of Trusts
3 explains that, with regard to amounts deducted by an employer for eventual contribution on
4 behalf of an employee, “[a] trust arises as to the amounts deducted as soon as they are either set
5 aside by the employer for the employees’ purposes or paid over to another person for those
6 purposes. Until then, the employer’s obligation is merely a debt, with the ‘obligee’ . . . holding
7 a chose in action . . . in trust.” Id. at § 5 cmt. k.
8 Applying these principles here, we hold that the unpaid employer contributions were not
9 assets of the plans. Although HM&E and the trustees were free to contractually provide for
10 some other result, nothing in the Plan Documents indicates that they did so. As the District
11 Court pointed out, the assets of the Funds are described as “contributions made by Employers”
12 (emphasis added), and the consequences for failing to pay the contributions include liability for
13 the delinquent amounts, as well as penalties and interest. This is the language of creditor and
14 debtor; there is no indication that the parties sought to displace the ordinary presumption that an
15 employer does not become a fiduciary of plan assets simply because it is under a contractual
16 obligation to contribute to an employee benefit fund.
17 The trustees point to our decision in United States v. LaBarbara, 129 F.3d 81 (2d Cir.
18 1997), which, they argue, compels a different result. There, the employer, Strathmore Concrete,
19 was contractually obligated to contribute to the funds of the union LaBarbara headed. Barone,
20 Strathmore’s owner, established Ju-Lin, a separate company which had no collective bargaining
21 agreement with the union. To avoid paying the union all of the funds Strathmore owed, Barone
22 engaged in a scheme called “double-breasting.” Under this practice, employers received a
7
1 weekly check from Strathmore for working up to thirty hours, and the required contribution
2 would be made to the funds. But for all hours worked over thirty, employees would receive a
3 paycheck from Ju-Lin and no contribution would be made to the fund. Through this scheme
4 Strathmore avoided paying substantial amounts due to the plans and LaBarbara accepted bribes
5 to facilitate this practice. Ultimately, LaBarbara was convicted of aiding and abetting Barone’s
6 embezzlement of ERISA funds.
7 On appeal LaBarbara contended that the monies owed to the plans were not plan assets
8 until paid. 129 F.3d. at 88. We stated that:
9
10 Once wages were paid to [the Union=s] members, Strathmore had
11 contractual obligations to the Funds that constituted “assets” of
12 the Funds by any common definition. Certainly, an audit of the
13 Funds would have to include such fixed obligations as assets.
14 LaBarbara=s acquiescence in the use of Ju-Lin as a vehicle to
15 convert those assets to Barone and to conceal Strathmore=s
16 contractual obligations aided or abetted a violation of [18 U.S.C.]
17 Section 664.3
18 Id.
19 The trustees argue that this language supports its position that the unpaid contributions
20 are assets, but we believe they read LaBarbara too narrowly. We did not find that the unpaid
21 funds were plan assets; rather, we concluded that Strathmore’s contractual obligation to the plan
22 was a chose in action, and hence an asset. Under this reasoning, we held that LaBarbara’s crime
3
The criminal statute cited here, 18 U.S.C. § 664, provides in pertinent part as follows:
Any person who embezzles, steals, or unlawfully and
willfully abstracts or converts to his own use of another,
any of the . . . assets of any employee welfare benefit plan
or employee pension benefit plan, or of any fund connected
therewith, shall be fined under this title, or imprisoned not
more than five years, or both.
8
1 was aiding and abetting Barone’s concealment of the union’s right to collect funds from
2 Strathmore, not the concealment of any actual funds. Consequently, we see no tension between
3 LaBarbara’s holding and our analysis here.
4 Not only does our caselaw support our conclusion here, but the Supreme Court has also
5 strongly indicated that unpaid contributions are not plan assets. See Jackson v. United States,
6 129 S. Ct. 1307 (2009) (Mem.), vacating and remanding 524 F.3d 532 (4th Cir. 2008). In
7 Jackson, the Fourth Circuit had held that employer contributions to ERISA plan “became assets
8 of the ERISA plans when they became due and payable.” Jackson, 524 F.3d at 542. The Court
9 granted certiorari, and vacated and remanded the case for re-consideration in light of the
10 position the Solicitor General articulated in its brief, a position that is congruent with ours here.
11 Previously, other circuits had reached the same result. In In re Luna, 406 F.3d 1192
12 (10th Cir. 2005), for example, the Tenth Circuit held that an employer’s failure to make
13 contributions to an ERISA plan created a creditor-debtor contractual relationship rather than a
14 fiduciary relationship. See id. at 1198-1201; see also In re M & S Grading, Inc., 541 F.3d 859,
15 865 (8th Cir. 2008) (concluding that when the employer “failed to make the payments to the
16 plans, the unpaid contributions remained corporate assets and did not become assets of the
17 plan”); ITPE Pension Fund v. Hall, 334 F.3d 1011, 1013 (11th Cir. 2003) (stating the rule that
18 unpaid employer contributions are not fund assets unless the agreement clearly declares
19 otherwise); Cline v. Indus. Maint. Eng’g & Contracting Co., 200 F.3d 1223, 1234 (9th Cir.
20 2000) (“Until the employer pays the employer contributions over to the plan, the contributions
21 do not become plan assets over which fiduciaries of the plan have a fiduciary obligation . . . .”).
22 From a policy standpoint, the Department of Labor correctly argues that the trustees’
9
1 position is not only against the weight of authority, but would also, if accepted, generate a
2 number of undesirable consequences. First, as a general rule, undefined statutory terms should
3 be construed in accordance with their common-law meaning. See United States v. Shabani, 513
4 U.S. 10, 13 (1994) (explaining that “absent contrary indications, Congress intends to adopt the
5 common law definition of statutory terms”); see also Nationwide Mut. Ins. Co. v. Darden, 503
6 U.S. 318, 322-23 (1992); Cmty. for Creative Non-Violence v. Reid, 490 U.S. 730, 739-40 (1989)
7 (using the common-law definition of “employee” to interpret a provision of the Copyright Act).
8 The term “assets” is critical to virtually all commercial transactions, and has a reasonably well
9 understood meaning that is imbedded in the common law of contracts, property and trusts. A
10 commonly understood definition of “assets” ensures that plans and related parties can look to an
11 established body of rules and principles to structure relationships. Ascribing a different
12 meaning to “assets” would deprive these relationships of an essential source of predictability
13 and coherence.
14 Moreover, if unpaid employer contributions were plan assets, the employer would
15 automatically become an ERISA fiduciary once it failed to make the payments. As such, the
16 employer would owe the plan undivided loyalty at the expense of competing obligations – some
17 fiduciary – to the business, and to others such as employees, customers, shareholders and
18 lenders, and an undifferentiated portion of the companies assets would be held in trust for the
19 plan. It is difficult to envision how proprietors could ever operate a business enterprise under
20 such circumstances. It is highly unlikely – indeed inconceivable – that Congress intended such
21 a result.
22 CONCLUSION
23 For the foregoing reasons, we AFFIRM the judgment of the District Court.
24
10