Fahey v. Fahey

• Decision Date: 20 November 2012
• Docket Number: Adversary No. 11–01118–WCH.,BAP No. MB 12–028.,Bankruptcy No. 11–10505–WCH.
• Citation: 482 B.R. 678
• Parties: James M. FAHEY, Jr., Debtor. Charles Raso, as Trustee and Treasurer, Massachusetts Bricklayers and Masons Health and Welfare, Pension, and Annuity Funds, Plaintiff–Appellant, v. James M. Fahey, Jr., Defendant–Appellee.
• Court: U.S. Bankruptcy Appellate Panel, First Circuit

482 B.R. 678

James M. FAHEY, Jr., Debtor.Charles Raso, as Trustee and Treasurer, Massachusetts Bricklayers and Masons Health and Welfare, Pension, and Annuity Funds, Plaintiff–Appellant,

v.James M. Fahey, Jr., Defendant–Appellee.

BAP No. MB 12–028.

Bankruptcy No. 11–10505–WCH.

Adversary No. 11–01118–WCH.

United States Bankruptcy Appellate Panel of the First Circuit.

Nov. 20, 2012.

Melissa A. Brennan, Esq., and Catherine M. Campbell, Esq., on brief, Boston, MA, for Appellant.

Gary W. Cruickshank, Esq., on brief, Boston, MA, for Appellee.

Before LAMOUTTE, KORNREICH, and CABÁN, United States Bankruptcy Appellate Panel Judges.

LAMOUTTE, Bankruptcy Judge.

Charles Raso (“Raso”) appeals from a bankruptcy court order granting summary judgment in favor of the debtor, James M. Fahey, Jr. (“Fahey”), on Count II of Raso's § 523(a)(4)¹ complaint seeking a determination that certain unpaid contributions to multiple employee benefit plans were nondischargeable. The bankruptcy court found that Raso failed to establish that Fahey acted in a fiduciary capacity, as required under § 523(a)(4). Because we conclude that Fahey acted in a fiduciary capacity as an ERISA ² fiduciary, as well as a fiduciary of a technical trust under common law, we REVERSE the order and REMAND for proceedings consistent with this opinion.

BACKGROUND

Fahey was formerly the president, treasurer, and sole shareholder of Zani Tile, Inc. (“Zani”), a business located in Watertown, Massachusetts. Raso was the president and secretary-treasurer of a labor organization known as Bricklayers and Allied Craftsmen Local Union No. 3 Massachusetts, Maine, New Hampshire, Rhode Island (“BAC Local 3”). He was also the trustee and treasurer of the Massachusetts Bricklayers and Masons Health and Welfare, Pension, and Annuity Funds (collectively, the “Funds”), which were multi-employer employee benefit plans. Each fund was a trust established pursuant to an Agreement and Declaration of Trust (“Trust Agreement”) for the purpose of receiving contributions from participating employers in order to provide health and welfare, pension, and annuity benefits to eligible employees pursuant to collective bargaining agreements (“CBA's”) between such employers and BAC Local 3. Each Trust Agreement provided, inter alia, that

The term “assets” shall mean all property held or owned by the Fund without regard to its quality or character, including any assets under the control or direction of Investment Managers that may be employed by the Fund. In addition, all contributions shall be considered and defined as plan assets including contributions that are properly due and owing but not yet paid to the Fund by Contributing Employers.

(emphasis added).

In January 2011, Fahey filed a voluntary petition for chapter 7 relief. On Schedule F, he indicated that Raso, as Trustee of BAC Local 3, held an approximate $200,000.00 disputed, unsecured claim.³ This debt represented union dues and employee benefit contributions which Zani failed to pay to the Funds. In April 2011, Raso filed a two-count nondischargeability complaint on behalf of BAC Local 3 against Fahey. In Count I, Raso alleged that prior to the commencement of Fahey's bankruptcy case, Zani entered into one or more CBA's with BAC Local 3, whereby Zani agreed to deduct union dues from the net wages of its employees and to forward payment to the Funds, as the collection agent of BAC Local 3. According to Raso, from March 2009 to April 2010, Fahey personally failed to remit to BAC Local 3 the union dues which he collected. Accordingly, in Count I, Raso claimed that “Fahey's act of deducting union dues from the paychecks of Zani employees and failing to disburse such monies to the Funds or BAC Local 3, constituted a fraud or defalcation while acting in a fiduciary capacity within the meaning of [ ] § 523(a)(4).”

In Count II, Raso alleged that the CBA's also required Zani to make pension, health, and annuity contributions to the Funds on behalf of certain employees. According to Raso, Zani failed to make the required contributions to the Funds for the period of March 2009 to April 2010. Raso further alleged in Count II that as a “ ‘fiduciary’ within the meaning of ... ERISA, 29 U.S.C. § 1002(21),” Fahey “exercised discretionary control over plan assets,” namely, the unpaid contributions. Accordingly, in Count II, Raso claimed that “Fahey's failure to pay plan assets, i.e. contributions that were due and owing [ ] to the Funds constituted a fraud or defalcation while acting in a fiduciary capacity within the meaning of 11 U.S.C. § 523(a)(4).” In his prayer for relief, Raso requested an order under § 523(a)(4), denying Fahey a “discharge as to any and all debts owed to” BAC Local 3.

Fahey filed an answer to the complaint, in which he: (1) denied that Raso held a claim against him, individually; (2) admitted that he exercised management control of Zani, but denied that he was a fiduciary of Zani or had any fiduciary duty to Raso; (3) denied that Raso had standing to raise any potential breach of fiduciary duty; and (4) denied that he breached his duty when he failed to remit the subject contributions.

Thereafter, on January 23, 2012, Raso filed a motion for summary judgment against Fahey on both counts of the complaint, arguing that the debt for unpaid contributions satisfied the elements required for nondischargeability under § 523(a)(4). He contended that: (1) the nonpayment of union dues and employee contributions constituted a defalcation under § 523; and (2) at the time of the defalcation, Fahey was a fiduciary within the meaning of ERISA, 29 U.S.C. § 1002(21)(A). In his accompanying statement of undisputed facts, Raso added, inter alia, that: (1) Zani made payments through August 2010 on a mortgage encumbering Fahey's home, notwithstanding Fahey's declaration in his Statement of Financial Affairs that he received no income from Zani in 2010; and (2) Zani made weekly payments of $1,463.33 to Fahey from January 7, 2010 to April 26, 2010, as well as payments of $6,000.00 and $1,000.00 on June 21, 2010, and June 26, 2010, respectively, notwithstanding Fahey'stestimony that he did not receive any money from Zani in 2010.

Attached to the affidavit Raso's counsel filed in support of summary judgment was the partial transcript of the November 2011 deposition of Fahey in which Fahey gave the following testimony regarding the evolution of his relationship to Zani: that from 1972 to 1995, he worked as a tile setter for Zani; that from 1995 until 2010, he was the president of Zani Tile; that he, his father, and another individual purchased Zani Tile; that in 2006, he became the sole shareholder of the business and acted in that capacity until August 2010, when Zani ceased operations. Fahey described himself as the “sole decision-maker of Zani,” responsible for determining “who should be paid and how much.” He admitted that it was his duty to ensure that the deductions for union dues were made, to decide whether to pay the federal taxes withheld from employees' wages, and to determine whether to pay the contributions which were due to the Funds. Additionally, according to Fahey's testimony, he oversaw the day-to-day operations of the business, including project management, purchasing, and bookkeeping. He further acknowledged that Zani made monthly payments through August 2010 to Citizens Bank on account of a $185,535.00 loan to Zani, which he guaranteed and secured with a mortgage on his properties located in Milton and East Dennis, Massachusetts.

Fahey filed a response to the summary judgment motion, in which he conceded that all unpaid deductions (amounting to $19,098.38) were nondischargeable and consented to the entry of summary judgment in Raso's favor on Count I. He opposed the entry of summary judgment on Count II, however, arguing that the failure to pay contributions (totaling $202,175.46) did not constitute fraud or defalcation while acting in a fiduciary capacity. Maintaining that “defalcation” is “a failure to produce funds entrusted ... to a fiduciary,” Fahey claimed that Raso failed to demonstrate that funds were entrusted to him. Moreover, Fahey claimed: 1) the failure to pay contributions was a breach of contract by Zani, for which he was not personally liable; and 2) such breaches are dischargeable in bankruptcy. Challenging the cases cited by Raso as inapposite and relying heavily on Rutanen v. Baylis (In re Baylis), 313 F.3d 9, 18–19 (1st Cir.2002), Fahey suggested that the level of fault required for defalcation was not present in this case. In his accompanying statement of disputed facts, Fahey contended that any funds he received in 2010 from Zani were for loan repayments which he believed did not constitute income requiring disclosure in his Statement of Financial Affairs.

On May 14, 2012,⁴ the bankruptcy court entered an Amended Order (“the Order”), granting Raso's motion for summary judgment on Count I. With respect to Count II, the court denied Raso's request for summary judgment and entered summary judgment in favor of Fahey. Because Fahey consented to the entry of summary judgment on Count I, the court primarily addressed Count II in its accompanying Memorandum of Decision.⁵See Raso v. Fahey (In re Fahey), 470 B.R. 649 (Bankr.D.Mass.2012).

At the outset, the bankruptcy court observed that the § 523(a)(4) exception requires a creditor to show that: (1) “an express or technical trust existed ...”; (2) “the debtor acted in a fiduciary capacity with respect to the trust;” and (3) “the debt arises from a defalcation, as the term is used in” § 523(a)(4). In re Fahey, 470 B.R. at 655. The court further acknowledged that a statutory trust may constitute a technical trust, and that ERISA may form the basis of a statutory trust if the following elements are satisfied: (1) “money was entrusted to a trustee;” (2) “ERISA creates or identifies fiduciary duties;” and (3) “the trust was in place when the defalcation giving...