Opinion
MEMORANDUM DECISION AND ORDER [Relates to Docket No. 9]
MARK S. WALLACE, Bankruptcy Judge.
This matter comes before the Court on Plaintiffs' motion for default judgment under Local Bankruptcy Rule 7055-1 (the "Motion"). For the reasons stated below, the Court grants the Motion and determines that debtor-defendant Dario Gomez's debt to Plaintiffs of $147, 805.68 is nondischargeable pursuant to 11 U.S.C. § 523(a)(4).
Debtor-defendant Dario Gomez ("Gomez") was the president and sole shareholder of D.G. Plumbing, Inc., a California corporation ("DG"). DG employed unionized plumbers and pipefitters and entered into a Master Labor Agreement obligating it to make contribution payments to health and welfare trust funds affiliated with Southern California Pipe Trades District Council No. 17 (such health and welfare trust funds being Plaintiffs herein). The complaint in this adversary proceeding alleges that such payments consist of both employer payments and payments made by the employer from moneys deducted from individual union member paychecks.
Complaint to Determine Nondischargeability of Debt (the "Adversary Complaint") at numbered paragraph 9.
DG breached its obligation to make timely contributions, and the Plaintiffs and DG and Gomez entered into a settlement agreement on or about March 17, 2011 to address the delinquencies and provide for make-up payments. Following the execution of this agreement, DG again began missing payments, resulting in delinquencies with respect to contributions for work performed from July 2011 through April 2012.
The Plaintiffs brought suit against DG and Gomez in the United States District Court for the Central District of California, the Honorable Cormac J. Carney presiding (the "District Court"). The complaint in the District Court action alleged not only breach of the settlement agreement by DG and Gomez, but also breach by Gomez of fiduciary duties under section 3(21)(A) of ERISA, 29 U.S.C. § 1002(21)(A), with respect to the exercise of discretionary authority or control over plan assets (i.e., the unpaid employer and employee contributions).
The District Court granted in substantial part a motion by plaintiffs therein (who are the Plaintiffs herein) for summary judgment. The District Court Order specifically references the unpaid contributions for work performed from and after July 2011 and grants summary judgment thereon to plaintiffs. The District Court Order notes that DG and Gomez conceded their liability for these amounts. Although the complaint in the District Court action states six causes of action or claims for relief, the only claims or causes of action against Gomez (other than the cause of action relating to the settlement agreement) are claims three and four, each of which involve breach of fiduciary duties under ERISA. Accordingly, it can be determined that the District Court, in rendering its decision, specifically decided that Gomez breached his fiduciary duties by diverting plan assets, namely, the employer and employee portions of the payments to the plaintiffs.
Order Granting in Substantial Part Plaintiffs' Motion for Summary Judgment (the "District Court Order").
District Court Order at 6.
As discussed below, the Court has concerns that unpaid employer contributions (as distinguished from the unpaid employee contributions) are plan assets which Gomez or DG had control over. However, this concern is irrelevant because the determination of the Motion is controlled by principles of collateral estoppel (issue preclusion). Such principles apply to bankruptcy nondischargeability actions under Bankruptcy Code section 523. Grogan v. Garner, 498 U.S. 279 (1991). The District Court necessarily decided that the unpaid contributions were plan assets when it granted summary judgment to plaintiffs based on the contributions that were due and owing for work performed from and after July 2011.
Upon default, the factual allegations of the complaint, except those relating to the amount of damages, are taken as true. Sharma v. Salcido (In re Sharma), BAP No. CC-12-1302, (BAP 9th Cir., May 14, 2013) at 16. The Adversary Complaint alleges that Gomez wrongfully misused and diverted trust assets for his sole and exclusive benefit. This is sufficient to satisfy the legal standard of "defalcation" within the meaning of Bankruptcy Code section 523(a)(4), which requires an intentional wrong, including reckless conduct. Bullock v. BankChampaigne, N.A., ___ U.S. ___, No. 11-518 (May 13, 2013). If the Court assumes, as it must, that the unpaid employer contributions are trust assets, Gomez committed intentional wrong constituting moral turpitude when he used plan assets for his own private purposes or those of DG.
Adversary Complaint at numbered paragraph 17.
But for the District Court action and the result therein, this Court might well have reached a different conclusion in this matter. The relevant agreement between DG, Gomez and Plaintiffs define plan assets to include unpaid amounts owed by employers under the Master Agreement. The asset in question is an account receivable, owed by DG to Plaintiffs. The account receivable was owned by Plaintiffs and possessed by Plaintiffs. Plaintiffs had full dominion and control over the account receivable from DG. From DG's standpoint, it was an account payable - which is a liability, not an asset. DG manifestly had no control or authority over the account receivable, as was amply demonstrated by Plaintiffs when they brought suit to collect the account receivable from DG.
This is in sharp contrast to the employee contributions which DG withheld from amounts paid to union members. Here, DG had possession of and control over moneys withheld that were unquestionably trust assets - either that, or DG fraudulently reported to union members a withholding that was never made, in which event fraud would have occurred.
The Court acknowledges a number of authorities cited by Plaintiffs' able counsel to the effect that unpaid employer contributions are plan assets in the hands of the employer-payor. The Court believes these cases are wrongly decided because they treat as a plan asset an item which, insofar as the employer is concerned, is in truth a liability, not an asset. Parties cannot by agreement turn a liability into an asset any more than they can by agreement turn a horse into a rhinoceros. In the case of employer contributions, there is no trust res under the employer's dominion and control unless and until the moneys are either paid over to the health and welfare funds or are segregated in some fashion and declared by the employer to be held in trust.
The account receivable is in the hands of the health and welfare funds and constitutes part of the trust res, but such res is under the control of the funds, not the employer.
IT IS ORDERED THAT debtor-defendant Dario Gomez's debt to Plaintiffs of $147, 805.68 is nondischargeable pursuant to 11 U.S.C. § 523(a)(4). Plaintiffs shall lodge a form of judgment within ten (10) days following the date of entry of this Memorandum Decision and Order.