In re Halpin

• Decision Date: 11 May 2009
• Docket Number: Docket No. 07-3234-bk (Con).,Docket No. 07-3206-bk (L).
• Parties: In re William C. HALPIN, Jr. Donald Rahm, Lawrence Spraragen, Joseph Gross, Philip Pacifico, Vincent J. Daley, Donald Hart, Plaintiffs-Appellants, v. William C. Halpin, Jr., Debtor-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

566 F.3d 286

In re William C. HALPIN, Jr. Donald Rahm, Lawrence Spraragen, Joseph Gross, Philip Pacifico, Vincent J. Daley, Donald Hart, Plaintiffs-Appellants, v. William C. Halpin, Jr., Debtor-Appellee.

Docket No. 07-3206-bk (L).

Docket No. 07-3234-bk (Con).

United States Court of Appeals, Second Circuit.

Argued: October 10, 2008.

Decided: May 11, 2009.

William Pozefsky, Pozefsky, Bramley & Murphy, Albany, NY, for Plaintiffs-Appellants.

Brian P. Rohan, Rohan & Associates, Albany, NY, for Debtor-Appellee.

Gregory F. Jacob, Timothy D. Hauser, Nathaniel I. Spiller, & Bruce C. Canetti, United States Department of Labor, Amicus Curiae in Response to the Court's Request.

Before B.D. PARKER, LIVINGSTON, Circuit Judges, CHIN, District Judge.^*

B.D. Parker, Jr., Circuit Judge:

This appeal presents a question of law: when do an employer's contributions to an employee benefit plan become "assets" under ERISA—when the contributions become due, or only after they are paid? We hold that, in the absence of provisions to the contrary in the relevant plan documents, unpaid contributions are not assets of the plan.

BACKGROUND

The relevant facts are undisputed. Debtor-Appellee William C. Halpin, Jr. was the President and sole shareholder of Halpin Mechanical & Electrical, Inc. ("HM & E"), an electrical contracting business. HM & E entered into a collective bargaining agreement and several subsidiary, plan-specific agreements (collectively, the "Plan Documents") with the International Brotherhood of Electrical Workers that required HM & E and its employees to contribute to various ERISA pension and benefit funds ("the Funds" or "plans"). The plans provide Union members with retirement income, apprenticeship training programs, health care, and other employee welfare benefits. Halpin himself was a participant.

Over time, HM & E failed to make employer contributions to the Funds as required by the Plan Documents.¹ During the same period, however, HM & E continued to pay Halpin's salary and other corporate debts. Eventually, both Halpin and HM & E filed for protection under Chapter 7 of the Bankruptcy Code and sought to be discharged from debts that included the unpaid contributions.

During bankruptcy proceedings, Plaintiffs-Appellants, the trustees of the Funds, moved to have the debt for the delinquent employer contributions deemed non-dischargeable. The trustees contended that the unpaid employer contributions were plan assets, and that Halpin had exercised sufficient authority over them to have become a fiduciary under ERISA. See 29 U.S.C. § 1002(21)(A). They alleged that Halpin had breached his fiduciary obligations to the Funds by causing HM & E to pay other creditors while failing to make the required employer contributions to the Funds. According to the trustees, this conduct violated 29 U.S.C. § 1104(a)(1), which requires that a plan fiduciary "discharge his duties ... solely in the interest of the [plan's] participants and beneficiaries." They therefore asserted that Halpin is personally liable for any losses to the plan resulting from this conduct. See 29 U.S.C. § 1109(a) ("Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries ... shall be personally liable to make good to such plan any losses to the plan resulting from each such breach...."). Moreover, they contended that any resulting liability could not be discharged in bankruptcy pursuant to § 523(a)(4) of the Bankruptcy Code, which bars the discharge of debts arising from "fraud or defalcation while acting in a fiduciary capacity." 11 U.S.C. § 523(a)(4). In response, Halpin took the position that, because the unpaid employer contributions were not plan assets, he was not a fiduciary and consequently did not violate § 1104(a)(1). Accordingly, he claimed that he was not personally liable under § 1109(a) and that there was no debt to discharge.

The Bankruptcy Court denied the trustees' motion and the District Court affirmed, concluding that the delinquent employer contributions were not plan assets and that Halpin was not a fiduciary. See In re Halpin, 370 B.R. 45, 48-50 (N.D.N.Y.2007). The District Court, relying on the Plan Documents, found no indication that the unpaid employer contributions became assets of the plan before actually being paid to the plan. In the District Court's view, the governing documents did not give the plan a property interest in funds still held by the company, and consequently, the unpaid employer contributions were contractually due payments, not plan assets. Id. at 48-49. The District Court thus concluded that Halpin's failure to make the required contributions did not constitute a breach of a fiduciary duty as Halpin was not a plan fiduciary with regard to those contributions and that Halpin was therefore not personally liable for any loss resulting from his conduct. This appeal followed, and we affirm.

DISCUSSION

Under ERISA, "a person is a fiduciary with respect to a plan to the extent ... he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets." 29 U.S.C. § 1002(21)(A). Therefore, to establish non-dischargeability under § 523(a)(4) the trustees must first show both that (1) the unpaid contributions were plan assets and (2) Halpin exercised a level of control over those assets sufficient to make him a fiduciary. We conclude that the unpaid contributions are not plan assets, and accordingly, we need not address the second part of this test.

As a question of law, we review de novo the issue of when unpaid contributions become assets under ERISA. See Robert Lewis Rosen Assocs. Ltd. v. Webb, 473 F.3d 498, 503 (2d Cir.2007). ERISA itself does not define "assets." See John Hancock Mut. Life Ins. Co. v. Harris Trust & Sav. Bank, 510 U.S. 86, 89, 114 S.Ct. 517, 126 L.Ed.2d 524 (1993). Although the Department of Labor ("the Department"), the agency charged with administering and enforcing Title I of ERISA, has officially issued a regulation that specifies when employee contributions become assets, see 29 C.F.R. § 2510.3-102, it has not issued a formal rule governing when employer contributions become plan assets.

In the absence of a formal rule or regulation, the Department has informally advised that "the assets of a plan generally are to be identified on the basis of ordinary notions of property rights under non-ERISA law." U.S. Dep't of Labor, Advisory Op. No. 93-14A (May 5, 1993). Assets will "include any property, tangible or intangible, in which the plan has a beneficial ownership interest," considering "any contract or other legal instrument involving the plan, as well as the actions and representations of the parties involved." Id. Applying this reasoning, the Department has taken the position through various informal agency pronouncements that "employer contributions become an asset of the plan only when the contribution has been made." Employee Benefits Sec. Admin., U.S. Dep't of Labor, Field Assistance Bulletin 2008-1, at 1-2 (Feb. 1, 2008); see also U.S. Dep't of Labor, Advisory Op. No. 93-14A (May 5, 1993); U.S. Dep't of Labor, Advisory Op. No.2005-08A (May 11, 2005). "However, when an employer fails to make a required contribution to a plan in accordance with the plan documents, the plan has a claim against the employer for the contribution, and that claim is an asset of the plan." Employee Benefits Sec. Admin., U.S. Dep't of Labor, Field Assistance Bulletin 2008-1, at 2 (Feb. 1, 2008).

The Department's position is reflected in its procedures for enforcing ERISA as outlined in its amicus brief. When an employer misappropriates contributions that the employee has made to ERISA funds, the Secretary sues the employer directly. In contrast, when an employer fails to pay contributions, and the plan's fiduciaries do not pursue the claim, the Secretary typically sues the fiduciaries for failing to enforce the plan's rights. Dep't of Labor Br. 14-15. In these cases, the Department's position is that the employer's failure to pay its contributions does not constitute a breach of fiduciary duty, and the Department lacks the authority to sue the employer directly.

We agree with the Department's interpretation that employer contributions become assets only after being paid.² Under "ordinary notions of property rights," if a debtor fails to meet its contractual obligations to a creditor, the creditor does not automatically own a share in the debtor's assets. The creditor, rather, has a "chose in action," an assignable contractual right to collect the funds owed by the debtor. See Mexican Nat'l R.R. Co. v. Davidson, 157 U.S. 201, 206, 15 S.Ct. 563, 39 L.Ed. 672 (1895). As one treatise explains, "[t]he terms `choses in actions' and `debts' are used by courts to represent the same thing when viewed from opposite sides. The chose in action is the right of the creditor to be paid, while the debt is the obligation of the debtor to pay." 63C Am.Jur.2d Property § 22 (2008). Accordingly, the unpaid amounts are debts; they are not assets held in trust for the benefit of the creditor.

Trust law similarly supports this analysis. Cf. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 110-11, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989) (directing courts to consider trust law when "develop[ing] a federal common law of rights and obligations under ERISA-regulated plans." (internal quotation marks omitted)). Under well-settled principles of trust law, a debtor-creditor relationship is not a fiduciary relationship. See Restatement (Third) of Trusts § 5(k) & cmt. k (indicating that the relationship of a debtor to a creditor is not fiduciary in nature; rather the creditor has a personal claim against the debtor); see also id. at § 5(i) & cmt. i (stating that a contract to convey property does not give rise to a fiduciary...