Yesterday, the U.S. Court of Appeals for the Ninth Circuit issued a decision inCarpenters Pension Trust Fund v. Moxley, No. 11-16133 (9th Cir., Aug. 20, 2013), holding that withdrawal liability is a debt that can be discharged in bankruptcy. The Court rejected the pension fund’s assertion that because its trust agreement defined delinquent contributions as plan assets, the employer was a fiduciary who could not discharge the withdrawal liability obligation because of a “defalcation” exception in the Bankruptcy Code. The case is noteworthy because it addresses a number of important issues relating to multiemployer plan obligations.

The defendant was a sole proprietor of a carpentry business who terminated his union agreement but continued to perform carpentry work. Under the construction industry rules of ERISA, this constituted a withdrawal, and he was assessed about $175,000 in withdrawal liability. He then filed a bankruptcy petition and sought to discharge the debt. The Fund objected based on the defalcation exception, which prohibits discharge of a debt that arises out of fraud or defalcation committed by the debtor when acting in a fiduciary capacity. The court rejected the Fund’s argument that the defendant was a fiduciary of the Fund because he controlled whether to pay the liability, which was treated as a contribution under ERISA’s collection provision and therefore fell under the trust agreement’s definition of plan assets. The U.S. Court of Appeals for the Third Circuit and some district courts in the Second Circuit and Ninth Circuit jurisdictions have held, in cases involving delinquent contributions, that when a multiemployer fund defines plan assets as including monies owed to the fund as delinquent contributions, a business owner or manager who elects to pay other bills and not the fund can be held personally liable as a fiduciary.

The Ninth Circuit elected to avoid deciding whether these delinquent contribution cases are good law – but did note that “money that is owed to the Fund is not in the Fund, and is therefore not yet a Fund ‘asset.’” The court relied on an earlier case that rejected a claim by employees that their employer committed a prohibited transaction by failing to make adequate contributions to their pension plan, on the grounds that unpaid contributions are not plan assets. Cline v. Industrial Maintenance Engineering & Contracting Co., 200 F.3d 1223 (9th Cir. 2000). The court also noted that under prior bankruptcy decisions, a debtor is not a fiduciary unless he was a fiduciary before the debt arose – the failure to pay the debt cannot create a fiduciary status that did not previously exist.

The Fund attempted to distinguish these prior cases by arguing that because the trust agreement defined unpaid contributions as plan assets, the defendant had always been a fiduciary, and the withdrawal liability fell within this definition because ERISA § 515 allows withdrawal liability to be collected as if it were contributions. The Ninth Circuit held that whether or not delinquent contributions could be plan assets, withdrawal liability could not be so characterized because it arises by statute, not contract, and arises after the contractual relationship ends. Therefore, it cannot be considered an unpaid contribution under the union contract.