In re Bucci

• Citation: 493 F.3d 635
• Decision Date: 03 July 2007
• Docket Number: No. 06-4164.,06-4164.
• Parties: In re Charles S. BUCCI, Debtor. Board of Trustees of the Ohio Carpenters' Pension Fund on Behalf of the Ohio Carpenters' Pension Fund, et al., Appellants, v. Charles S. Bucci, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

493 F.3d 635

In re Charles S. BUCCI, Debtor Board of Trustees of the Ohio Carpenters' Pension Fund on Behalf of the Ohio Carpenters' Pension Fund, et al., Appellants, v. Charles S. Bucci, Appellee.

No. 06-4164.

United States Court of Appeals, Sixth Circuit.

Argued: June 7, 2007.

Decided and Filed: July 3, 2007.

ARGUED:

Richard L. Stoper, Jr., Rotatori, Bender, Gragel, Stoper & Alexander Co., Cleveland, Ohio, for Appellants. Keith L. Borders, Rauser & Associates Legal Clinic Co., Cleveland, Ohio, for Appellee.

ON BRIEF:

Richard L. Stoper, Jr., Rotatori, Bender, Gragel, Stoper & Alexander Co., Cleveland, Ohio, for Appellants. Keith L. Borders, Rauser & Associates Legal Clinic Co., Cleveland, Ohio, for Appellee.

Before: MARTIN and SUTTON, Circuit Judges; GRAHAM, District Judge.^*

OPINION

GRAHAM, District Judge.

This action presents the question of whether the United States Bankruptcy Code excludes from discharge a debt that an employer owes for failing to contribute to employee benefit funds. Debtor Charles S. Bucci signed a collective bargaining agreement in 2003 requiring his company, Floors by Bucci, Inc., to make monthly contributions to pension and fringe benefit funds. Bucci admits that he failed to contribute to the funds for over a year. In 2005, he filed a Chapter 7 bankruptcy petition.

Appellants, who represent the various funds (the "Funds"), filed an adversary proceeding in the bankruptcy court, seeking a declaration that Bucci's debt could not be discharged. They argued that his failure to contribute to the funds was a "defalcation while acting in a fiduciary capacity" under 11 U.S.C. § 523(a)(4). The bankruptcy court held that § 523(a)(4) did not apply because there was no evidence demonstrating Bucci acted as a fiduciary of the monies owed to the funds. On appeal, the district court affirmed and rejected the Funds' contention that Bucci's status as a fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA) also made him a fiduciary for purposes of § 523(a)(4)'s defalcation provision.

Because the requirements for a defalcation under § 523(a)(4) are not met in this case, we AFFIRM.

I.

Bucci is the president and sole shareholder of Floors by Bucci, Inc. In February 2003, he signed the Northeast Ohio Carpenters' Collective Bargaining Agreement. Article XXV of the CBA required Bucci's company to make monthly contributions to certain pension, hospitalization, and annuity funds. The amount of the contribution to each fund was set by a rate specified in Appendix D to the CBA. In addition, the CBA required Bucci's company to withhold union dues and vacation benefits from employees' wages. Under the CBA, wage statements provided to employees had to indicate the amount of employer contributions and wage withholdings being made for each pay period.

In January 2005, Bucci filed a Chapter 7 bankruptcy petition. He scheduled a $99,000 debt to the benefit funds for unpaid employer contributions and withholdings.

On April 11, 2005, the boards of trustees for the Funds filed an adversary proceeding against Bucci. The complaint alleges that Bucci should be treated as the alter ego of Floors by Bucci because he acted as the only officer and director of the company, made all corporate decisions, owned 100% of the company's stock, and ignored corporate separateness from his personal financial affairs. The complaint further alleges that from March 2003 through May 2004, Bucci failed to make the employer contributions required by the CBA and failed to remit union dues and vacation benefits that he had withheld from his employees' wages. According to the complaint, Bucci owed to the Funds $61,300 in employer contributions and $24,500 in related delinquency assessments, and he owed $9600 in wage withholdings and $3900 in related delinquency assessments. The complaint seeks a declaration that Bucci's debts for unpaid contributions and withholdings are not dischargeable in bankruptcy because they qualify as debts from defalcation and from embezzlement under 11 U.S.C. § 523(a)(4).

Bucci did not dispute before the bankruptcy court that he was an alter ego of Floors by Bucci or that he had failed to pay the contributions and withholdings. The parties filed cross-motions for summary judgment on the claims of defalcation and embezzlement. The bankruptcy court found that the unpaid employer contributions were not a debt from defalcation because Bucci did not act as a fiduciary of the contributions. Citing Commonwealth Land Title Co. v. Blaszak (In re Blaszak), 397 F.3d 386 (6th Cir.2005), the court held that a defalcation is limited to situations where the parties to a creditor-debtor relationship intend for the debtor to act as a trustee of the monies owed. The bankruptcy court concluded that even though Bucci had a contractual obligation to pay the contributions, there was no evidence that Bucci acted as a trustee. The court further held that the embezzlement provision of § 523(a)(4) did not apply because Bucci's mere failure to pay a contractual obligation did not constitute embezzlement. Thus, the court concluded that the debt for unpaid employer contributions was dischargeable.

In contrast, the bankruptcy court concluded that the debt for unpaid wage withholdings was excluded from discharge. The court found that the CBA created a trust, with the withheld wages as the trust res and Bucci as the trustee. In the bankruptcy court's view, the wages Bucci withheld from employees' paychecks belonged to the employees as earned compensation under the CBA. Bucci was entrusted with those wages and was required to turn them over to the union and vacation benefit fund. The bankruptcy court therefore found that Bucci was a fiduciary of the withheld wages and that his failure to remit the entrusted monies was a defalcation.

Only the bankruptcy court's ruling regarding employer contributions was appealed to the district court. The Funds argued that the bankruptcy court should have relied on ERISA law to find that Bucci was a fiduciary of the employer contributions. The district court rejected this argument and held that under Blaszak, the defalcation provision does not apply unless the debtor holds the monies in trust. The court ruled that being an fiduciary under ERISA's broad definition of that term is not enough. The district court found no evidence that Bucci acted as a fiduciary of the contributions and affirmed the bankruptcy court's decision.

The Funds now appeal the decision of the district court. For the reasons stated below, we affirm.

II.

On appeal of a district court's initial appellate review of a bankruptcy court's decision, "this court independently reviews the bankruptcy court's findings of fact for clear error and its conclusions of law de novo." R.E. America, Inc. v. Garver (In re Garver), 116 F.3d 176, 178 (6th Cir.1997). Debtor Charles S. Bucci concedes that he should be treated as his company's alter ego and that he failed to make the monthly employer contributions the CBA required him to make. The primary issue on appeal is whether Bucci's debt from failing to remit the employer contributions is excluded from discharge as a defalcation while acting in a fiduciary capacity. Also at issue is whether Bucci's debt is nondischargeable as an embezzlement.

The Bankruptcy Code "does not discharge an individual debtor from any debt . . . for fraud or defalcation while acting in a fiduciary capacity." 11 U.S.C. § 523(a)(4). A "defalcation" encompasses not only embezzlement and misappropriation by a fiduciary, but also the "failure to properly account for such funds." Capitol Indemnity Corp. v. Interstate Agency, Inc. (In re Interstate Agency), 760 F.2d 121, 125 (6th Cir.1985) (internal quotations omitted). A debt is nondischargeable as a defalcation when the preponderance of the evidence establishes: "(1) a preexisting fiduciary relationship; (2) breach of that fiduciary relationship; and (3) a resulting loss." In re Blaszak, 397 F.3d at 390.

The Sixth Circuit "construes the term `fiduciary capacity' found in the defalcation provision of § 523(a)(4) more narrowly than the term is used in other circumstances." In re Blaszak, 397 F.3d at 391. In Carlisle Cashway, Inc. v. Johnson (In re Johnson), 691 F.2d 249, 251-52 (6th Cir.1982), and In re Interstate Agency, 760 F.2d at 125, we limited the application of the defalcation provision to express or technical trusts and refused to extend it to constructive or implied trusts imposed by operation of law as a matter of equity. The decisions in those cases relied on the Supreme Court's holding in Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S.Ct. 151, 153, 79 L.Ed. 393 (1934), that the defalcation provision applies only to express or technical trusts. Again in In re Garver, we adopted a narrow definition of the defalcation provision and held that it does not apply to someone who merely fails to meet an obligation under a common law fiduciary relationship. In re Garver, 116 F.3d at 179 ("The attorney-client relationship, without more, is insufficient to establish the necessary fiduciary relationship for defalcation under § 523(a)(4)."). Accordingly, the defalcation provision applies to "only those situations involving an express or technical trust relationship arising from placement of a specific res in the hands of the debtor." In re Garver, 116 F.3d at 180.

To establish the existence of an express or technical trust, a creditor must demonstrate: "(1) an intent to create a trust; (2) a trustee; (3) a trust res; and (4) a definite beneficiary." In re Blaszak, 397 F.3d at 391-92 (citing Graffice v. Grim (In re Grim), 293 B.R. 156, 166 (Bankr. N.D.Ohio 2003)). Though the court in In re Blaszak spoke of "an intent to create a trust," it is clear in this circuit that a statute may create a trust for purposes of § 523(a)(4) if that statute defines the trust res, imposes duties on the trustee, and those duties exist prior to any act of...