Trs. of the Sheet Metal Workers' Nat'l Pension Fund v. Kakareko (In re Kakareko)

• Decision Date: 19 July 2017
• Docket Number: Case No: 14–73390–las,Adv. Pro. No. 14–08229–las
• Citation: 575 B.R. 12
• Parties: IN RE: Walter KAKAREKO III, Debtor. Trustees of the Sheet Metal Workers' National Pension Fund; Trustees of the National Energy Management Institute Committee for the Sheet Metal and Air Conditioning Industry; Trustees of the Sheet Metal Occupational Health Institute Trust ; Trustees of the International Training Institute for the Sheet Metal and Air Conditioning Industry; and Trustees of the National Stabilization Agreement of the Sheet Metal Industry Fund, Plaintiffs, v. Walter Kakareko III, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of New York

575 B.R. 12

IN RE: Walter KAKAREKO III, Debtor.Trustees of the Sheet Metal Workers' National Pension Fund; Trustees of the National Energy Management Institute Committee for the Sheet Metal and Air Conditioning Industry; Trustees of the Sheet Metal Occupational Health Institute Trust ; Trustees of the International Training Institute for the Sheet Metal and Air Conditioning Industry; and Trustees of the National Stabilization Agreement of the Sheet Metal Industry Fund, Plaintiffs,

v.Walter Kakareko III, Defendant.

Case No: 14–73390–las

Adv. Pro. No. 14–08229–las

United States Bankruptcy Court, E.D. New York.

July 19, 2017

Jeffrey S. Dubin, Amy E. Lucas–Strang, Jeffrey S. Dubin PC, Huntington, NY, for Plaintiff.

Anthony F. Giuliano, Pryor & Mandelup, Scott L. Swanson, Pryor & Mandelup LLP, Westbury, NY, for Defendant.

MEMORANDUM OPINION AND ORDER DENYING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

Louis A. Scarcella, United States Bankruptcy Judge

I. Introduction

Plaintiffs Sheet Metal Workers' National Pension Fund ("NPF"), National Energy Management Institute Committee for the Sheet Metal and Air Conditioning Industry ("NEMIC"), Sheet Metal Occupational Health Institute Trust ("SMOHIT"), International Training Institute for the Sheet Metal and Air Conditioning Industry ("ITI"), and National Stabilization Agreement of the Sheet Metal Industry Fund ("SASMI") (collectively, "plaintiffs") bring this action asserting that the debt owed them by defendant Walter Kakareko III ("defendant"), the debtor in this chapter 7 case, is not dischargeable under 11 U.S.C. § 523(a)(4).¹ Nondischargeability under § 523(a)(4) requires a showing that the debt at issue was obtained by (i) fraud or defalcation while acting in a fiduciary capacity, (ii) embezzlement, or (iii) larceny. In their complaint, plaintiffs allege that they are employee benefit plans under Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001, et seq ., and that their debt in the amount of $448,588.80 arises out of the failure of All Seasons Siding, Inc. ("All Seasons") to pay outstanding employer contributions to plaintiffs pursuant to certain collective bargaining agreements for which defendant is personally liable. Plaintiffs contend that defendant, as an officer of All Seasons, had authority and control over the management and disposition of employee benefit plan assets, and the failure of All Seasons to account for and pay over employee benefit fund contributions renders its debt nondischargeable under § 523(a)(4) based upon defendant's defalcation while acting in a fiduciary capacity.

Now before the Court is plaintiffs' motion for summary judgment [Adv. Dkt. No. 11]² pursuant to Rule 56 of the Federal Rules of Civil Procedure, made applicable here by Bankruptcy Rule 7056. Defendant filed opposition to the motion, and plaintiffs replied. The Court has carefully reviewed the moving, opposing and reply papers and considered the parties' oral argument. For the reasons discussed in this Memorandum Opinion and Order, material issues of fact preclude summary judgment, and on that basis, the motion is denied.

II. Jurisdiction

The Court has jurisdiction over this matter under 28 U.S.C. § 1334(a) and (b) and the Standing Order of Reference entered by the United States District Court for the Eastern District of New York pursuant to 28 U.S.C. § 157(a), dated August 28, 1986, as amended by Order dated December 5, 2012, effective nunc pro tunc as of June 23, 2011. Consideration of the motion is a core proceeding under 28 U.S.C. § 157(b)(2) in which final orders or judgment may be entered by this Court pursuant to 28 U.S.C. § 157(b)(1).

III. Background

a. Factual Background ³

Plaintiffs are multi-employer, employee benefit funds within the meaning of Section 3(3) of ERISA. Pls.' 7056–1 ¶ 1; Strang Decl., Exhibits C, D and E; see 29 U.S.C. § 1002(3). Defendant was a principal owner and President of All Seasons, a New York corporation engaged in the installation and repair of sheet metal exteriors for commercial structures. Pls.' 7056–1 ¶ 3; Def. Aff. ¶ 2; April 2014 Dep. 12:10–23. Originally a 50% shareholder when he began working at All Seasons in 1994, defendant's ownership interest was increased to 80% around 2009.⁴ April 2014 Dep. 8:12–13:17.

All Seasons entered into collective bargaining agreements under which All Seasons was obligated to make certain contributions to plaintiffs based upon the hours worked by the participants employed by All Seasons.⁵ April 2014 Dep. 16:9–17:17; Def. 7056–1 ¶ 5. Pursuant to the collective bargaining agreements, All Seasons was required to make contributions to plaintiffs for the period of January 1, 2009 through February 28, 2013. Pls.' 7056–1 ¶ 16; Strang Decl. Exhibit C, Art. XII B, Exhibit D, Art. XII B, Exhibit E, Art. XII B. Plaintiffs are third party beneficiaries of the collective bargaining agreements. Pls.' 7056–1 ¶ 5, 6; Strang Decl., Exhibit C, Art. XII B; Exhibit D, Art. XII B; Exhibit E, Art. XII B. The collective bargaining agreements incorporate by reference certain agreements and declarations of trust of plaintiffs. Pls.' 7056–1 ¶ 7; Strang Decl., Exhibit C, Art. XII B, Sections 21C and 24A; Exhibit D, Art. XII B, Sections 21C and 24A; Exhibit E, Art. XII B, Sections 21C and 24A. The collective bargaining agreements provided, inter alia :

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.

Pls.' 7056–1 ¶ 9; Strang Decl., Exhibit C, Art. XII A, Section 19.B, Art. XII B, Section 24.B; Exhibit D, Art. XII A, Section

19.B, Art. XII B Section 24.B; Exhibit E, Art. XII A, Section 19.B, Art. XII B, Section 24.B.

On July 17, 2012, defendant and Henneborn signed a confessed judgment note agreeing that All Seasons, and defendant and Henneborn, individually, owed plaintiffs $229,596.27 in delinquent contributions, interest and liquidated damages. Strang Decl., Exhibit P.

b. Procedural History

Defendant filed a voluntary petition for chapter 7 relief on July 25, 2014. On November 10, 2014, NPF filed a proof of claim for $448,588.80 constituting unpaid contributions, plus interest and liquidated damages, in defendant's bankruptcy case.

On August 15, 2014, plaintiffs filed a complaint against defendant. [Adv. Dkt. No. 1]. Plaintiffs' claim is premised on defendant's exercise of authority or control over the management or disposition of certain assets of plaintiffs within the meaning of Section 1002(21)(A) of ERISA. Compl. ¶¶ 28, 35. Plaintiffs alleged that plan assets include the unpaid employer contributions, and defendant determined whether All Seasons timely made contributions to plaintiffs. Compl. ¶¶ 14, 29–34. Plaintiffs contend that by exercising control over plan assets defendant is an ERISA fiduciary within the meaning of Section 3(21) of ERISA, 29 U.S.C. § 1002(21)(A), and defendant breached his fiduciary duty by permitting plan assets to be used for purposes other than payment to plaintiffs. Compl. ¶¶ 37, 38, 40.

Defendant answered the complaint. [Adv. Dkt. No. 3]. In his answer, defendant asserted that he did not exercise authority or control over the management or disposition of corporate assets, nor did he have authority and control over contributions by All Seasons to plaintiffs. Ans. ¶¶ 6, 11.

Plaintiffs filed the motion for summary judgment claiming that defendant's debt for unpaid contributions was nondischargeable under § 523(a)(4) because his failure to make the required contributions to plaintiffs constituted defalcation while acting in a fiduciary capacity. Defendant filed opposition. [Adv. Dkt. No. 16]. Defendant argued that: (1) he did not have the requisite intent for defalcation as set forth by the Supreme Court in Bullock v. BankChampaign, N.A. , 569 U.S. 267, 133 S.Ct. 1754, 185 L.Ed.2d 922 (2013) ; (2) intent under § 523(a)(4) is a fact intensive question that cannot be decided on summary judgment; (3) the relationship between defendant and plaintiffs is not a trust relationship as required by § 523(a)(4) ; (4) the absence of an express trust indicates that defendant did not possess the requisite intent; and (5) defendant did not act as a fiduciary to plaintiffs. Id. Plaintiffs filed a reply in further support of the motion, arguing that (i) defendant was a fiduciary under ERISA and for purposes of § 523(a)(4) and (ii) defendant consciously disregarded a substantial and unjustifiable risk that his conduct would violate his fiduciary duties. [Adv. Dkt. No. 18]. After the Court heard oral argument, the motion was marked submitted.

IV. Legal Standard

Under Rule 56 of the Federal Rules of Civil Procedure, made applicable to this adversary proceeding by Bankruptcy Rule 7056, summary judgment may not be granted unless the movant shows, based on admissible evidence in the record placed before the court, "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) ; see also Celotex Corp. v. Catrett, 477 U.S. 317, 322–23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ("[S]ummary judgment is proper ‘if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.’ ") (quoting former Fed. R. Civ. P. 56(c) ). A fact is considered material if it "might affect the outcome of the suit under the governing law," and a genuine dispute exists where "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

The moving party bears the burden of...