Employer Wins Bankruptcy Discharge of Withdrawal Liability

The Ninth Circuit Court of Appeals recently ruled that employers may discharge multiemployer trust withdrawal liability in bankruptcy.  Employers required to contribute to multi-employer pension trusts face growing withdrawal liability for unfunded pension liability.  Until now it has been unclear whether withdrawal liability could be discharged in bankruptcy.  This was because a number of federal court decisions labeled employers fiduciaries for unpaid contributions owed to the trust; since some types of fiduciary debt are non-dischargeable in bankruptcy the fiduciary label clouded the issue of dischargeability of the debt in bankruptcy.

In Carpenters Pension Trust Fund for Northern California v. Moxley  ___ F.3d ___ (2013 9th Cir.) (2013 WL 4417594 August 20, 2013) the Ninth Circuit Court of Appeals ruled in favor of the employer, allowing the employer to discharge its withdrawal liability in bankruptcy.  This was a significant victory for employers on an issue that the Ninth Circuit had not considered before.

Some basics.  Under ERISA, employers contributing to multi-employer pension funds are liable for their portion of unfunded but vested pension liability if they withdraw from the trust.  This occurs because the trustees of the fund inaccurately estimate investment returns, interest rates, employer contributions, or liability to employees.  Withdrawal liability in some industries has been skyrocketing as businesses fail, consolidate or lose union membership.  Some of the worst hit industries include construction, printing, manufacturing, and retail.  Some estimates place unfunded vested multiemployer pension liabilities in excess of $165 billion1.  Even small employers with less than 50 employees are often faced with unfunded withdrawal liability in the millions of dollars.

Thus, an employer whose business is failing is often faced with a difficult choice: continue in business to avoid assessment of millions of dollars of withdrawal liability or cease operations and be hit with a multimillion withdrawal pension claim.  Bankruptcy is one option businesses analyze for relief from this burden.

However, the issue of dischargeability of withdrawal liability in bankruptcy has been complicated by federal decisions in California and elsewhere holding that employers who owe funds to an ERISA trust are fiduciaries of the trust, at least as to those funds.  Many of these cases dealt with delinquent contributions claims by trustees2.  Many  trusts define trust “assets” to include contributions due but unpaid from an employer.  Some courts have used this contractual language to find that employers were fiduciaries under ERISA because they controlled trust assets.  29 U.S.C. §1002(21)(A).

The Bankruptcy Code excludes from a bankruptcy discharge “fraud or defalcation” by a debtor while acting in a fiduciary capacity.  11 U.S.C. § 523 (a) (4).  So characterization as a fiduciary under ERISA could render the debt nondischargeable under the defalcation-by-fiduciary exception in the Bankruptcy Code.

Fortunately for employers, the Ninth Circuit held in Carpenters Pension Trust Fund for Northern California v. Moxley  ___ F.3d ___ (2013 9th Cir.) (2013 WL 4417594 August 20, 2013) that withdrawal liability is dischargeable.  The Trustees in Moxley argued that because the employer owed funds to the Trust the employer was a fiduciary, relying on decisions within and outside the Ninth Circuit that used language in the trust documents contractually categorizing any contributions owed by an employer as Trust assets to find that the employer was a fiduciary under ERISA.

The Moxley Court disagreed and held that to prove the employer was a fiduciary under ERISA, the Trustees had to show the employer had control over Trust assets.  Citing to its earlier decision, the court noted that money that is owed the Trust is “not in the Fund, and is therefore not yet a Fund ‘asset.’”  The Court noted that the Trustees made a persuasive argument that given the contractual language of the Trust documents, unpaid contributions might be considered plan assets.

Ultimately, though, the Moxley Court decided in the employer’s favor based on the Bankruptcy Code’s requirement that the fiduciary relationship has to exist before the bad act of nonpayment.  In other words, a fiduciary duty does not exist under the Bankruptcy Code’s exception if the fiduciary duty is created by the failure to pay.  Since withdrawal liability arises under statute when the employer withdraws, there was no pre-existing fiduciary duty concerning the delinquent withdrawal liability payments.  Withdrawal liability is different than contractually required contributions, and thus the Trust’s argument about the contractual language was unsuccessful.

This cases assists employers facing large withdrawal liability with a failing business.  An employer in that setting may obtain discharge of the debt in bankruptcy.  It is important to emphasize that this case did not answer the question of whether an employer can obtain discharge of its liability for delinquent contributions.  The Moxley court provided encouragement when it stated that unpaid contributions are not in the Trust and thus are not trust assets.  However, the court also implied that the Trust had made a convincing argument that the trust documents converted unpaid contributions into trust assets.  That issue will have to be resolved in a future decision.

Another caveat, Moxley may place the Ninth Circuit at odds with other Circuit Courts, which in turn may result in the Supreme Court resolving the issue, especially given the large sums at issue nationwide.  We will keep you informed.

Topics:  Commercial Bankruptcy, ERISA, Fiduciary Duty, Multiemployer Plan, Pensions, Trusts, Withdrawal Liability

Published In: Bankruptcy Updates, Business Organization Updates, Finance & Banking Updates, Labor & Employment Updates, Wills, Trusts, & Estate Planning Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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