Fighting an Uphill Battle: Reconciling Unpaid Contributions of Multiemployer Pension Plans With the Bankruptcy Code's Defalcation Provision

Publication year2016

Fighting an Uphill Battle: Reconciling Unpaid Contributions of Multiemployer Pension Plans with the Bankruptcy Code's Defalcation Provision

Nicole Adalaide Griffin


Five circuit courts have determined whether an employer's unpaid contributions due under an employee benefit plan can be classified as plan assets under ERISA. When unpaid contributions are plan assets, the individual exercising authority or control over the assets is imputed fiduciary status under ERISA and, in turn, owes certain fiduciary duties and obligations to the employee benefit funds. If the fiduciary fails to make the required contributions, thereby breaching his or her duties under ERISA, then he or she becomes personally liable for the unpaid contributions. In bankruptcy, this result means that the unpaid contributions would be a nondischargeable debt if the court holds the individual liable for defalcation.

In 2005, the Tenth Circuit was the first circuit to address whether unpaid contributions can be plan assets in a bankruptcy proceeding. Subsequently, in 2007 and 2015, the Sixth and Ninth Circuits decided this issue within the bankruptcy context and elected to either follow the Tenth Circuit's guidance or deviate slightly to reach an identical final result, making the unpaid contributions a dischargeable debt.

A circuit split now exists. On the one hand, the two circuits that decided this issue in nonbankruptcy proceedings have either (1) held an individual liable as an ERISA fiduciary for the unpaid contributions; or (2) recognized the potential to hold an individual liable for the unpaid contributions under the right set of circumstances. On the other hand, the three circuits that decided this issue in bankruptcy have either (1) failed to classify unpaid contributions as plan assets; or (2) failed to extend ERISA's definition of "fiduciary" into the bankruptcy context, ultimately finding that the debts are dischargeable in bankruptcy.

This Comment seeks to reconcile the circuit split by proposing a three-step approach that will allow courts determining this issue in bankruptcy proceedings to mirror their counterparts while still protecting and preserving the spirit of the Bankruptcy Code. Adopting this approach will bring clarity to a muddled and complex area of the law and ensure that dishonest debtors are

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held accountable under § 523(a)(4) for their willful and conscious disregard of the fiduciary duties owed to dependent employees.


Millions of Americans depend on employer contributions to employee benefit funds as a means of achieving their retirement savings goals.1 Employer contributions represent "more than 35% of the total contributions on average to an employee's workplace savings account."2 Employees place such a high value on employer contributions that 43% admitted "they would settle for lower pay if it meant they received a higher employer contribution to their retirement plan accounts."3 Further, "only 13% [of employees] sa[id] they would take a job with no company match, even if it came with a higher pay level."4

Dependence upon employer contributions may help explain why 64% of Americans are concerned about not having enough money for retirement.5 Gallup notes that "[s]ince [it] began polling Americans in 2001 about their financial concerns, a majority have continually been worried about not being able to afford retirement—the top overall concern in each of those 16 years."6 These statistics suggest "that saving for retirement disquiets Americans in both good and bad economic times."7 When employers fail to hold up their end of the bargain and become unable or unwilling to make the promised contributions, employees are often left frustrated and in need of legal assistance.8

With respect to multiemployer pension plans, "the amount of the employer's contribution is usually set by a collective bargaining agreement

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that specifies a contribution formula (such as $3 per hour worked by each employee covered by the agreement) and further provides that contributions must be paid to the plan on a monthly basis."9 If an employer fails to make the required contributions, the Employee Retirement Income Security Act ("ERISA") "permits the plan to sue and obtain the delinquency plus interest, liquidated damages, court costs, and reasonable attorney fees."10 Additionally, many courts have imputed fiduciary duties to employers in their individual capacities for failing to make the required contributions where the governing agreements specifically classify all employer contributions as plan assets.11 Despite such rulings, the majority rule is that an employer's unpaid contributions are not plan assets.12 When the unpaid contributions are not plan assets, the employer is not liable for the contributions as an ERISA fiduciary.13

The circuit courts are divided on the issue of what constitutes a plan asset when dealing with unpaid contributions. Three circuits have held that the unpaid contributions themselves can be a plan asset.14 These courts found that the individuals who had failed to make contributions to the employee benefit funds may be ERISA fiduciaries.15 Two other circuits have held that the contractual right to bring a claim with respect to the unpaid contributions is the plan asset; the unpaid amounts themselves are not.16 These circuits refrained from imputing ERISA fiduciary status to the employers.17

When this issue arises in the context of a bankruptcy proceeding, the circuit courts split once again, but in a different way. While the circuits deciding this issue outside of bankruptcy interpret ERISA broadly, expanding the traditional understanding of what it means to be a "fiduciary,"18 the circuits deciding this issue within the bankruptcy context recognize fiduciary status in very limited

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circumstances and interpret the definition of "fiduciary" narrowly.19 In other words, courts have been reluctant to impute fiduciary duties to employers when bankruptcy proceedings accompany the otherwise identical factual scenarios.20 Thus, when a company owner in control of company finances files for bankruptcy in his or her individual capacity, the unpaid contributions are often dischargeable. This result leaves employees without a remedy.21 Because of the increasing amount of unpaid contributions and inconsistent judicial opinions, support for private pension reform has been rising steadily.22

While the purpose of the Bankruptcy Code (the "Code") is to provide a fresh start for the debtor by discharging contractual debts, thereby relieving the debtor of those obligations, the Code does not provide such relief for dishonest debtors who have engaged in fraudulent conduct.23 This concept is hardly novel, and one would be hard pressed to find a court that would hold otherwise. By deviating from the reasoning of their counterparts, however, courts deciding this issue in bankruptcy are sidestepping ERISA and facilitating discharges for potentially dishonest debtors who have breached their fiduciary duties to employees. Thus, the conflict that the courts have created is illogical and further complicates an already complex area of the law.

Although ERISA plans "are just too complex and varied for everyone to understand" and "[e]mployees and plan participants cannot be expected to know all the ins and outs governing their ERISA plans,"24 it should be understood that "fiduciaries—the people who run and manage the plans—have certain obligations to plan participants . . . [and] when they breach their fiduciary duty—employees can file an ERISA lawsuit to attempt to recover their missing funds."25 By refraining to impute fiduciary duties to employers

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who file for bankruptcy, courts have further, and unnecessarily, muddled ERISA law. If courts were to adopt a systematic approach that takes into account the totality of the circumstances surrounding each individual case, it would produce two effects. First, courts would be able to hold individual employers accountable for breaching their fiduciary duties. Second, courts would still be able to preserve the public policy concern of protecting honest debtors in bankruptcy proceedings.

This Comment will focus primarily on the bankruptcy component of the circuit split and will remain agnostic to all other aspects of the split. That is to say, this Comment will assume it is possible for unpaid contributions to be plan assets. This Comment will begin by discussing the history of multiemployer pension plans, while also providing insight on ERISA reforms. Next, this Comment will compare the broad interpretation "fiduciary" receives under ERISA with the narrow interpretation "fiduciary" receives under the Code by discussing the decisions of the circuit courts that have decided whether an individual can be held personally liable for an employer's unpaid contributions. Finally, this Comment will propose a three-step approach courts should adopt when determining the dischargeability of unpaid contributions. First, when the governing agreement between the parties unambiguously categorizes unpaid contributions as plan assets, courts should defer to the contractual intent of the parties and recognize unpaid contributions as plan assets. Second, courts should presume that "fiduciary" has a consistent meaning under both ERISA and the Code. Third, courts should determine the dischargeability of unpaid contributions under § 523(a)(4) in a bankruptcy proceeding on a case-by-case basis after evaluating the totality of the circumstances.

I. Background

Pension law is no stranger to the old adage, "It gets worse before it gets better." A series of incidents arose throughout the twentieth century that set the stage for ERISA's enactment in 1974. Before discussing these incidents, however, it is important to understand the...

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