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In re Halpin

June 7, 2007


Bankr. Case No. 03-12077

Chapter 7


I. Background

This matter comes before the Court on appeal from the United States Bankruptcy Court, Northern District of New York. Plaintiff-Appellants, members of the International Brotherhood of Electrical Workers Local 236 ("Plaintiff-Appellants" or the "Union") and trustees of various benefit funds*fn2 (the "Benefit Funds") of which the Union is a participant, filed an objection to the dischargeability of certain debt pursuant to 11 U.S.C. §523(a)(4). The debt at issue consists of monies that Halpin Mechanical & Electric, Inc. ("HM&E"), by and through William C. Halpin, Jr., in his capacity as president of HM&E, was obligated to contribute towards the Benefit Funds. Order (Dkt. No. 4, Attach. 2) at 2.*fn3 Appellee failed to remit contributions from July 2002 through January 2003, resulting in a total amount due of $44,452.24. Id. Plaintiffs seek to offset the debt, pursuant to 11 U.S.C. §553(a), with the Debtor-Appellee William C. Halpin, Jr.'s ("Appellee") annuity and pension benefits, amounts claimed by Appellee to be exempt from his bankruptcy estate.

Plaintiff-Appellants allege that Appellee bears personal liability for the contributions owed to the Benefit Funds on the grounds that his mishandling of the funds was a breach of fiduciary duty. Plaintiff-Appellant's Brief (Dkt. No. 10) at 9; see also 29 U.S.C. §1109(a). An individual's liability "for fraud or defalcation while acting in a fiduciary capacity" is non-dischargeable in bankruptcy. See 11 U.S.C. § 523(a)(4). Accordingly, Plaintiff-Appellants seek findings that 1) Appellee was a fiduciary of the plan, 2) the contributions had become plan assets while they were under Appellee's control, and 3) Appellee's handling of the assets constituted a breach of fiduciary duty. Hon. Robert E. Littlefield, Jr., United States Bankruptcy Judge, noting that these issues are inter-connected, determined that Plaintiff-Appellants had not shown that the contributions were plan assets and that Appellee was not, therefore, a fiduciary, since he did not have control or authority over any funds that were plan assets. Order (Dkt. No. 4, Attach. 2) at 11-12.

Additionally, Judge Littlefield found that Plaintiff-Appellants were not entitled to offset Appellee's liability with his annuity and pension funds, on the grounds that the right to setoff only overrides a debtor's claimed exemptions if the debtor had breached a fiduciary duty to the fund. Order (Dkt. No. 4, Attach. 2) at 13-14. Since the Court had already determined that Appellee did not have a fiduciary duty, setoff was unavailable. Id.

II. Discussion

A. Standard of Review

In reviewing a decision from the Bankruptcy Court, this court accepts all factual findings, unless clearly erroneous, but reviews all conclusions of law de novo. See In re Ionosphere Clubs, Inc. 922 F.2d 984, 988-989 (2d Cir. 1990). As the parties and the Bankruptcy Court agreed that there were no triable issues of fact, the findings in the decision are entirely legal conclusions, and will be reviewed de novo. See Order (Dkt. No. 4., Attach. 2) at 3.

B. Fraud or Defalcation While Acting in a Fiduciary Capacity

Under 11 U.S.C. § 523, an individual debtor is not discharged from a debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." 11 U.S.C. § 523(a)(4). Plaintiff-Appellants claim that HM& E's unremitted contributions qualify under that statute because Appellee misappropriated the funds, while he was acting in a fiduciary capacity. Appellee denies the unpaid contributions became plan assets before they were transmitted; he asserts that his possession of those monies did not constitute control over plan assets or give rise to fiduciary responsibilities. Plaintiff-Appellants bear the burden of proving the elements of nondischargeability by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291 (1991).

A person is a fiduciary of a benefit plan under ERISA: "to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation..., or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan." 29 U.S.C. § 1002 (21)(A).

This test is functional, rather than formal, meaning that a person's responsibilities and actions with regard to plan assets, not her title, determines whether she is a plan fiduciary. Blatt v. Marshall & Lassman, 812 F.2d 810, 812 (2d Cir. 1987). "An entity need only have 'sufficient control over at least a part of the [plan] assets to create a fiduciary relationship.'" Trs. of Conn. Pipe Trades Local 777 Health Fund v. Nettleton Mech. Contractors, 478 F. Supp. 2d 279, 282 (D. Conn. 2007) (quoting United States v. Glick,142 F.3d 520, 527 (2d Cir. 1998). Judge Littlefield determined that the employee benefit fund contributions at issue did not become plan assets when due, so Appellee never had any authority ...

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