Bd. of Trs. of the Sheet Metal Workers Int'l Ass'n Local Union No. 28 Trust Funds v. Kern (In re Kern)
| Decision Date | 09 April 2017 |
| Docket Number | Case No.: 13–71700–ast,Adv. Proc. No.: 13–08177–ast |
| Parties | IN RE: Richard KERN, Debtor. Board of Trustees of the Sheet Metal Workers International Association Local Union No. 28 Trust Funds, Plaintiffs, v. Richard Kern, Defendant. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York |
Danielle M Carney, Hempstead, NY, Dana L Henke, Barnes Iaccarino & Shepherd LLP, Elmsford, NY, Jeffrey S Dubin, Amy E Lucas–Strang, Jeffrey S Dubin PC, Huntington, NY, for Plaintiffs.
Jonathan S Pasternak, Steven R Schoenfeld, DelBello Donnellan Weingarten Wise & Wiederkehr, LLP, White Plains, NY, for Defendant.
DECISION AND ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT AND GRANTING IN PART AND DENYING IN PART DEFENDANT'S CROSS–MOTION FOR SUMMARY JUDGMENT
The Plaintiffs are the Board of Trustees of certain benefit funds established under the framework of ERISA. Defendant Richard Kern was the principal owner and control person of a closely held company which employed union members who were entitled to have contributions made on their behalf to the benefit funds and their union for at least three different purposes, which contributions were deducted from their employee paychecks. The Court has determined on summary judgment that certain but not all of the monies deducted from the employee paychecks give rise to non-dischargeable debts pursuant to § 523(a)(4) of the Bankruptcy Code ; specifically, monies deducted for a vacation fund is non-dischargeable because those funds were subject to a statutory trust, Debtor acted as a fiduciary, and Debtor committed a defalcation when he did not remit such deducted monies to the benefit funds; however, monies deducted for union assessments and political action league funds are dischargeable because a statutory trust did not exist as to such monies.
This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A), (I), and (O), and 1334(b), and the Standing Orders of Reference in effect in the Eastern District of New York dated August 28, 1986, and as amended on December 5, 2012, but made effective nunc pro tunc as of June 23, 2011. Furthermore, this Court has the authority to enter a final order in this non-dischargeability action. See VW Credit, Inc. v. Salim (In re Salim) , No. 13-42974 (ESS), 2015 WL 1240000, 2015 Bankr. LEXIS 815 (Bankr. E.D.N.Y. Mar. 16, 2015).
The Court is not stating findings of facts and conclusions of law because Rule 52(a)(3) of the Federal Rules of Civil Procedure (the "Federal Rules"), incorporated by Rule 7052 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"), does not so require in ruling on a motion for summary judgment.
On April 3, 2013, Debtor Richard Kern ("Debtor" or "Defendant") filed a petition for relief under chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101 et seq. (the "Bankruptcy Code").2 [case no. 13–71700; dkt item 1]On September 17, 2013, Debtor's chapter 11 case was converted to a case under chapter 7. [case no. 13–71700; dkt item 76]
On January 29, 2014, Debtor received his discharge under chapter 7. [case no. 13–71700; dkt item 96]
On January 31, 2014, the Clerk of the Court notified all creditors of Debtor's discharge. [case no. 13–71700; dkt item 97]
On November 7, 2013, Plaintiffs the Board of Trustees of the Sheet Metal Workers International Association Local Union No. 28 Trust Funds ("Trustees" of the "Benefit Funds" or "Plaintiffs"), timely commenced this adversary proceeding by filing a complaint seeking a determination of non-dischargeability under §§ 523(a)(4) and (6) (the "Complaint"). [dkt item 1]
On December 9, 2013, Defendant filed an answer to the Complaint asserting general denials. [dkt item 3]
Because the parties agreed that a matter then sub judice with this Court in a related matter could affect the outcome here, on September 26, 2014, the Court approved a stipulation deferring proceedings until after the Court decided summary judgment motions in adversary proceeding Sheet Metal Workers' National Pension Fund v. Richard Kern , 542 B.R. 87 (" Kern I "). [dkt item 17] In Kern I , different benefit funds alleged this same Debtor committed defalcation while acting in his fiduciary capacity when he failed to make certain employer contributions.
On December 10, 2015, the Court entered a Decision and Order in Kern I determining that Debtor did not have non-dischargeability liability under § 523(a)(4). Sheet Metal Workers' National Pension Fund v. Kern (In re Kern) , 542 B.R. 87 (Bankr. E.D.N.Y. 2015).
The parties thereafter filed competing motions for summary judgment (together, the "Motions").3 On June 24, 2016, Defendant filed a letter that the Motions were fully submitted to the Court. [dkt item 33]
The Benefit Funds are and were employee benefit plans within the meaning of Section 3(3) of ERISA, 29 U.S.C. § 1002(3).4 Defendant was the principal owner of the now defunct closely held corporation, Cool Sheetmetal, Inc. ("CSI").5 CSI was an employer within the meaning of Section 3(5) of ERISA, 29 U.S.C. § 1002(5).6 CSI entered into contracts which, inter alia , provided for contributions to be made by CSI to the Benefit Funds.7
The Benefit Funds are expressly third party beneficiaries of the CBA's.8
The CBA's provide that the employer shall pay a set amount of money for each hour payable to all applicable employees, to be used exclusively to provide paid vacations for eligible employees:
...the Employer shall pay three dollars and twenty-five cents ($3.25) for each hour paid for all employees covered by this Agreement. The contributions of the Employers shall be used exclusively to provide paid vacations for eligible employees .
(emphasis added) (the "Vacation Fund").9 The Vacation Fund contributions are an employer obligation; the CBA's do not provide, upon written authorization or otherwise, that the employer may deduct money from employee paychecks for Vacation Fund contributions.
Tom Irwin was an employee of CSI.10 During the pay periods ending April 7, 2010 through May 12, 2010, CSI deducted Vacation Fund contributions from Mr. Irwin's paycheck.11
The CBA's provide that Vacation Fund contributions are vested in the Trustees of the Benefit Fund:
contributions are considered assets of the respective Funds and title to all monies paid into and/or due and owing said Funds shall be vested in and remain exclusively in the Trustees of the respective Funds. The Employer shall have no legal or equitable right, title or interest in or to any sum paid by or due from the Employer.
(emphasis added).12
Additionally, the CBA's provide for a union assessment to be paid by CSI from monies deducted from employee paychecks:
The Employer agrees to deduct from the wages of its employees, upon written authorization from the employees , two percent (2%) of the total wage and fringe benefit package plus organizing contribution of five cents ($.05) for each hour paid ("assessment "). Assessment deductions shall be remitted weekly to the Financial Secretary of Local Union No. 28 together with a list of names of employees to whom said monies are to be credited. The Union shall have the right to withdraw manpower from the Employer, in addition to all other rights and remedies it might have, for failure to remit said monies weekly.
(emphasis added) (the "Union Assessment").13
The CBA's provide that the Union Assessment is an asset of the General Fund:
Dues and assessments are considered assets of the General Fund (Union) and title to all monies paid to and/or due and owing to the Union shall be vested in and remain exclusively in the Union.14
Additionally, the CBA's provide for a Political Action League deduction from employee paychecks of $.05 and $.07 per hour:
The Employer, upon written authorization from the employee, shall deduct from wages seven cents ($.07) per hour and remit same to the Local Union No. 28 Political Action League. The Union has a right to reallocate as it sees fit . Contributions to the Political Action League are not deductible for Federal Income Tax purposes.
(emphasis added) (the "PAL").15
As the principal owner of CSI, Richard Kern exercised authority, control and management over the disposition of assets of CSI, and had decision making authority with respect to whether or not to pay the obligations of CSI, and determined whether or not CSI made contributions to the Benefit Funds.16
While it was operating, CSI periodically fell behind in making contributions due to the Benefit Funds.17 On November 18, 2009, CSI and Kern entered into a settlement agreement with Plaintiffs ("Settlement Agreement"), in which CSI and Kern agreed to pay Plaintiffs the amount of $3,725,612.45, representing contributions due to the Plaintiffs from the period of the week ending December 13, 2006 through September 23, 2009; incident thereto, CSI and Kern signed an affidavit of confession of judgment.18 On September 2, 2010, a judgment by confession was entered against CSI and Kern in the amount of $3,037,156.17 (the "Judgment").19 On or about January 3, 2012, a partial satisfaction of the Judgment was filed with the state court, leaving a balance due of $2,306,237.24.20
On December 1, 2011, CSI was terminated as a Sheet Metal Workers' National Pension Fund contributing employer.21 As a result, on December 13, 2011, the Local Union 28 prohibited CSI from employing Local Union 28 members (the "Termination").22 This Termination led to a loss of union employees and contributed to CSI's inability to continue its business operations.23
From September 16, 2010, to February 7, 2012, Debtor and his wife, Sharon Kern,...
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