Herbert v. Hesse (In re Hesse)

• Decision Date: 28 July 2014
• Docket Number: Bankruptcy No. 13–11988.,Adversary No. 13–1111.
• Citation: 516 B.R. 491
• Parties: In re Gerald W. HESSE, Debtor. Ken Herbert, Plaintiff v. Gerald W. Hesse, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

516 B.R. 491

In re Gerald W. HESSE, Debtor.Ken Herbert, Plaintiff

v.Gerald W. Hesse, Defendant.

Bankruptcy No. 13–11988.

Adversary No. 13–1111.

United States Bankruptcy Court, S.D. Ohio, Western Division.

Signed July 28, 2014.

Kenneth L. Ross, Cincinnati, OH, for Debtor.

MEMORANDUM OPINION DENYING CROSS MOTIONS FOR SUMMARY JUDGMENT

BETH A. BUCHANAN, Bankruptcy Judge.

Before this Court are the parties' cross-motions for summary judgment¹ regarding certain retirement plan benefits allegedly owed to Plaintiff Ken Herbert (“Herbert ”).Herbert is a former employee of G.W. Hesse Plumbing Service Company (“Hesse Plumbing ”), an Ohio corporation owned by Debtor Defendant Gerald W. Hesse (the “Debtor ”).Herbert contends that from April 2000 through March 2013, $41,220.47 was withheld from his pay for contributions (the “Direct Contributions ”)to an ERISA qualified retirement plan (the “Retirement Plan ”)² established by Hesse Plumbing for the benefit of its employees but that only $37,236.39 was deposited into the Retirement Plan, resulting in a shortage of $3,984.08. He further contends that Hesse Plumbing only partially funded the 3% matching contribution that the company was obligated to make under the terms of the Retirement Plan (the “Matching Contributions ”), resulting in an additional shortage of $24,316.43. Herbert argues that he holds a nondischargeable claim against the Debtor pursuant to 11 U.S.C. § 523(a)(4)³ for defalcation while acting in a fiduciary capacity based on the Debtor's control over Hesse Plumbing and the Retirement Plan. The Debtor counters that summary judgment should be granted in his favor because the Debtor and Hesse Plumbing are separate legal entities and that he is not individually liable for claims against the corporate entity.

With regard to the Direct Contributions, both parties' Motions for Summary Judgment are denied because this Court finds that there are questions of fact regarding (i) the Debtor's control over Hesse Plumbing and/or over the Retirement Plan and (ii) the amount of Herbert's alleged damages for Herbert's Direct Contributions. With regard to the Matching Contributions, Herbert's Motion for Summary Judgment is also denied, as a matter of law, because there was no pre-existing fiduciary obligation to make the Matching Contributions—which is a necessary element to establishing a claim under § 523(a)(4) —any debts relating to the Matching Contributions are not excepted from discharge.⁴

I. Jurisdiction

This Court has subject matter jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I).

II. Summary Judgment Standard

The standard for summary judgment is set forth in Rule 56(a) of the Federal Rules of Civil Procedure (the “Civil Rules ”), made applicable to this proceeding by Rule 7056 of the Federal Rules of Bankruptcy Procedure. Civil Rule 56(a) provides that a “court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). “As to materiality, the substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment.”

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A “genuine” dispute exists only where “evidence is such that a reasonable [finder of fact] could return a [judgment] for the non-moving party.” See id.; Gallagher v. C.H. Robinson Worldwide, Inc., 567 F.3d 263, 270 (6th Cir.2009). In reviewing a motion for summary judgment, this Court must view all inferences to be drawn from the underlying facts in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587–88, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) ; Anthony v. BTR Auto. Sealing Sys., Inc., 339 F.3d 506, 511 (6th Cir.2003).

III. Legal Analysis

A. Herbert's Motion For Summary Judgment Is Denied.

Section 523(a)(4) is one of the enumerated exceptions to discharge under the Bankruptcy Code. Specifically, § 523(a)(4) provides that a debtor is not discharged of debts “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” 11 U.S.C. § 523(a)(4). In his Motion for Summary Judgment, Herbert focuses on the “defalcation while acting in a fiduciary capacity” component of § 523(a)(4).⁵

The Sixth Circuit has defined defalcation while acting in a fiduciary capacity as a misappropriation of funds by a fiduciary, as long as the use was not the result of mere negligence or a mistake of fact. Patel v. Shamrock Floorcovering Servs., Inc. (In re Patel), 565 F.3d 963, 970 (6th Cir.2009) ; see also First Am. Title Ins. Co. v. Gaskill (In re Gaskill), 480 B.R. 291, 303 (Bankr.W.D.Mich.2012) (creditor must show debtor was objectively reckless) (citations omitted). A creditor must show: “(1) a pre-existing fiduciary relationship, (2) a breach of that relationship, and (3) a resulting loss.” In re Patel, 565 F.3d at 968 (citing Bd. of Trustees v. Bucci (In re Bucci), 493 F.3d 635, 642 (6th Cir.2007) ). The Sixth Circuit has adopted a narrow interpretation of a fiduciary in the context of Section 523(a)(4) to include only express or technical trusts. Id. (citing Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S.Ct. 151, 79 L.Ed. 393 (1934) ). Proving an express trust relationship requires the creditor to show: “(1) an intent to create a trust; (2) a trustee; (3) a trust res; and (4) a definite beneficiary.” Id. (citing Commonwealth Land Title Co. v. Blaszak (In re Blaszak), 397 F.3d 386, 391 (6th Cir.2005) ). A technical trust is a type of trust arising out of a specific statute or common law. Ronk v. Maresh (In re Maresh), 277 B.R. 339, 348 (Bankr.N.D.Ohio 2001) (citations omitted). The creditor bears the burden of proving these elements by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).

Relying on Chao v. Gott (In re Gott), 387 B.R. 17 (Bankr.S.D.Iowa 2008), Herbert alleges that the Debtor's control over Hesse Plumbing and his control over the Retirement Plan are sufficient to create an express or technical trust for purposes of § 523(a)(4). In In re Gott, the court held that the debtor was a fiduciary under § 523(a)(4) based on the debtor's control over his company's SIMPLE–IRA plan. Id. at 25. The court found that the debtor, as the president of the company, was “the only individual identified in the record as having ultimate control of company decisions.” Id. The court further found that debtor was the person who signed the agreements establishing the plan and was the person who signed the majority of checks that transferred the funds withheld from employees' paychecks to the administrator of the plan. Id. Accordingly, the In re Gott court concluded that the debtor was a fiduciary within the meaning of § 523(a)(4).

Herbert alleges in his Motion for Summary Judgment that the facts of this case are similar to the facts in In re Gott and therefore support a determination in his favor. Specifically, Herbert states that the Debtor “managed the day-to-day operations of the company and was the only person with check-writing authority for the Plan. He exercised discretionary authority over the management of the Plan and the disposition of its assets and its general administration.” Herbert's Motion for Summary Judgment, p. 6. Herbert, however, offers no evidence in support of these assertions. See Fed.R.Civ.P. 56(c) (made applicable to adversary proceedings by Fed. R. Bankr.P. 7056 ). The only evidence in the record is Herbert's statement in his affidavit that it is his “understanding and belief that the Defendant is the sole owner of the Company and he was solely responsible for all payroll issued.” As such, this Court cannot find on the record currently before it that the Debtor was a fiduciary within the meaning of § 523(a)(4) on the grounds that he controlled Hesse Plumbing and the company's Retirement Plan.

Moreover, with regard to the Direct Contributions, additional questions of fact preclude summary judgment in favor of Herbert. In his affidavit, Herbert avers that $3,060 in Direct Contributions were withheld from his wages in 2005 and Direct Contributions of $3,120 were withheld in 2012, however, the Form W–2 statements attached to the affidavit reflect that only $2,580 in Direct Contributions were withheld in 2005 and $3,060 in 2012. See Herbert's Reply, pp. 2–3 and Ex. A, pp. 2, 5. These inconsistencies likewise draw into question Herbert's assertions regarding Direct Contributions withheld for tax years 2000, 2001, 2002 and 2013 since there are no Form W–2 statements provided in support of his affidavit. Finally, there is no evidence in the record, such as periodic statements from the Retirement Plan, to establish what amounts were actually deposited into the Retirement Plan on Herbert's behalf. Accordingly, Herbert's Motion for Summary Judgment is denied as there is a genuine dispute regarding material facts.

With regard to the Matching Contributions, Herbert's Motion for Summary Judgment is also denied, as a matter of law. “[F]or a trust relationship to satisfy § 523(a)(4), the alleged fiduciary must have duties that preexist the act creating the debt.” In re Bucci, 493 F.3d at 643 (citations omitted). While Hesse Plumbing/the Debtor may have had a contractual obligation to make the Matching Contributions, there was no pre-existing fiduciary obligation to do so. Id. (“The key point for bankruptcy purposes, however, is that [the debtor] had only a contractual obligation to pay the employer contributions. This is not enough, for the debtor must hold funds in trust for a third party to satisfy the fiduciary relationship element of the...