Opinion
No. 888-80114-20.
September 20, 1988.
Dennis D. Crowley, Westbury, New York, attorney for the debtor.
Paul J. McTague, Deputy Regional Solicitor, U.S. Department of Labor, Boston, Massachusetts, attorney for the creditor.
Ronald Lipshie, Baldwin, New York, trustee.
Discharge of Debts — Trustee — Employee Benefit Fund — Defalcation. — A debtor-employer, the trustee of a company profit-sharing plan qualified under the Employee Retirement Security Act (ERISA), who used funds from that plan to run his business after getting into financial difficulty, has been found to have breached his fiduciary duty so that his debt to the plan was nondischargeable under Section 523(a)(4).
See Sec. 523(a)(4) at ¶ 9230 and Sec. 523(c) at ¶ 9237.
History
An order for relief under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 101 et seq., was issued for Gerald J. Ardito on January 29, 1988 upon his filing of a voluntary petition. A complaint seeking a determination of the dischargeability of a debt was filed on April 27, 1988. The debtor's answer was filed on May 19, 1988.
On July 6, 1988, the plaintiff filed a notice of motion seeking summary judgment due to the lack of a triable issue of material facts. The defendant's Affirmation in Opposition was filed on July 25, 1988 and a hearing was held on the motion on July 28, 1988 upon the completion of which the Court reserved decision.
Facts
The following facts can be determined from the complaint and admissions in the answer.
This proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). The defendant is indebted to the plaintiff for restitution to the Deena Packaging Industries Profit Sharing Plan (Plan) in the total amount of $707,169. A judgment was entered to that effect by the United States District Court for the Eastern District of New York (ERISA Decision) on June 1, 1987 pursuant to a Memorandum Opinion issued by the Honorable I. Leo Glasser on May 22, 1987 which opinion contained Findings of Fact and Conclusions of Law.
It was further admitted that the defendant was at all relevant times the sole trustee of the Plan and served in a fiduciary capacity pursuant to Sec. 3(21)(A) of the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 10C2(21)(A). He was also the president and majority shareholder of Deena Packaging Industries, Inc., which was a company that eventually failed in bankruptcy.
The defendant accepted the forfeiture of the vested benefits of two plan participants which totaled $35,548 and credited this amount to his personal account. He borrowed $165,741 from the Plan which amount he states that he applied "perhaps imprudently" to the benefit of the business; but, of which he never repaid any principal or paid interest. The defendant transferred another $175,000 from the Plan account to the defendant's personal account and to a Deena Packaging Industries, Inc. account. The defendant permitted a $15,000 participant loan to be defaulted on and made no attempt to recover payment. He caused the Plan to incur an early withdrawal penalty of $4,603 when he cashed a certificate of deposit to borrow funds for the benefit of his company, which funds passed through his personal account. The defendant failed to recover $2,328 in excess benefits distributed by the Plan.
The complaint alleges that the defendant failed to account for $13,039 of Plan assets which the district court directed were to be delivered to a court-appointed trustee. The defendant's answer states that he delivered to the trustee all Plan funds under his control as of the date of the district court adjudication, but does not state the amount of these funds; therefore, the Court finds for the purpose of this motion that some, if not all, of this amount remains unaccounted for.
Discussion
Bankruptcy Rule 7056 make Rule 56 of the Federal Rules of Civil Procedure applicable in adversary proceedings. Rule 56 provides that a "judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c).
On a motion for summary judgment, the burden is, therefore, placed on the movant to demonstrate the absence of a genuine issue of material fact, and the Court, in considering the motion, must resolve all ambiguities and draw all reasonable inferences in favor of the party against whom the motion is brought. National Union Fire Insurance Co. of Pittsburgh, PA v. C.P.P. Insurance Agency, Inc. 563 F. Supp. 1216 (S.D.N.Y. 1983). Summary judgment is appropriate where parties dispute the significance of events, but do not dispute which events actually occurred. Transamerica Delaval, Inc. v. Citibank, N.A, 545 F. Supp. 200 (S.D.N.Y. 1982).
The defendant, in his Memorandum in Opposition to the plaintiff's motion, asserts that summary judgment cannot be granted because, although he acknowledges that he acted in a fiduciary capacity, there remains a factual issue of whether the acts committed which were found by the district court to constitute a violation of ERISA also constitute a defalcation under Sec. 523(a)(4) of the Bankruptcy Code which would cause the resulting debt to be excepted from discharge under the Code.
Summary judgment is appropriate when a decision turns on the meaning of words in a statute Dennison v. Topeka Chambers Industrial Development Corp. 527 F. Supp. 611 (D. Kansas 1981). Where one party's papers do not allege facts which controvert those stated in another's but, rather assert that factual issues exist and challenge the legal conclusions to be drawn from facts whose truth was not and could not be challenged, the opponent's papers raise legal issues only, which appropriately should be decided on a motion for summary judgment. See Kirkland v. New York State Department of Correctional Services, 482 F. Supp. 1179 (S.D.N.Y. 1980) affirmed 628 F.2d 796, certiorari denied Fitzpatrick v. Kirkland, 101 S.Ct.1515, 450 U.S. 980, 67 L.Ed.2d 815.
In this matter, the defendant is requesting the Court to determine whether the definition of defalcation encompasses the acts committed, therefore, the Court is presented only with a question of law. Summary judgment is, therefore, appropriate and is granted.
Section 523(a)(4) of the Bankruptcy Code permits debts arising from fraud or defalcation while acting in a fiduciary capacity; embezzlement, or larceny to be declared nondischargeable if a request for such relief is made pursuant to Sec. 523(c). In this case, as stated above, the Secretary of Labor has requested that the debt owed to her department be declared non-dischargeable due to and alleged defalcation by the defendant while he was acting in a fiduciary capacity.
Sec. 523(a)(4) is understood to require that the fiduciary capacity result from an express trust. In Re Cooper 10 Bankr. Ct. Dec. 1152, 30 B.R. 484 (Bankr. App. Panel, 9th Cir., 1982). The defendant, on the first page of his Memorandum in Opposition to Plaintiff's Motion for Summary Judgment, acknowledges that he was acting in a fiduciary capacity according to the definition of fiduciary in ERISA, 29 U.S.C. Sec 1002(21)(A). This is consistent with an admission, in responsive clause number 9 of his answer to the complaint, that he was at all relevant times the sole trustee of the Plan and served in a fiduciary capacity pursuant to Sec. 3(21)(A) of ERISA, 29 U.S.C. § (21)(A). This admission also satisfies the court that the defendant was acting as trustee pursuant to an express trust so that the provisions of Sec. 523(a)(4) apply.
Defalcation, as that term is applied by the Bankruptcy Code, has been defined to be broader than fraud, embezzlement or misappropriation, Central Hanover Bank Trust Co. v. Herbst 93 F.2d 510 (2d Cir. 1937). It has been held that debts are non-dischargeable where there has been a "failure to meet an obligation; misappropriation of trust funds or money held in a fiduciary capacity; and failure to properly account for such funds." In Re Kleppinger, 27 B.R. 530, 532 (M.D. Pa. 1982). In addition, it has been held that an objective standard is applied, that neither malicious intent nor even bad faith need be proven; therefore, a defalcation may be found where there has been a diminution, abatement or deficit in an account as a result of a mistake or negligence in addition to misconduct. See, In Re Johnson 691 F.2d 249 (6th Cir. 1982).
The debtor, in his Surreply to Plaintiff's Response, argues that his acts were not for personal gain, but were for the benefit of the corporation which funded the pension fund, however, the mere act of using trust funds for any purpose other than the purpose for which the trust was created, however unintentional, constitutes a defalcation which renders the debt non-dischargeable. In Re Laverne E. and Betty A. Matheson 7 B.C.D. 643 (B.C.S.D. Al 1981). Another court has held that where an officer and major shareholder of a corporation diverts money in order to keep his business alive such defalcation serves his personal purpose and, therefore, a resulting judgment debt is excepted from discharge by Sec. 523(a)(4). In Re Tocci 9 C.B.C.2d 636 (B.C.S.D. Fl 1983).
The debtor also argues that he did not knowingly violate the provisions of ERISA, however, this court has stated that "either participation in the use of trust funds for other business purposes, or mere knowledge of this wrong, is sufficient to give rise to personal liability for breach of the trust. In Re Polidoro 12 B.R. 867, 871 (B.C.E.D.N.Y. 1981)
In light of the acts admitted by the debtor and due to the breadth of the definition of defalcation as that term is applied under Sec. 523(a)(4), it appears clear that the debtor has committed a defalcation such that the judgment debt owed to the plaintiff must be excepted from discharge.
SO ORDERED.