U.S. Dep't of Labor v. Harris (In re Harris)

• Decision Date: 03 August 2018
• Docket Number: No. 17-1261,17-1261
• Citation: 898 F.3d 834
• Parties: IN RE: Michael P. HARRIS, as surety for Faribault Mills Inc., as surety for Faribault Woolen Mill Company Debtor U.S. Department of Labor Appellee v. Michael P. Harris Appellant
• Court: U.S. Court of Appeals — Eighth Circuit

898 F.3d 834

IN RE: Michael P. HARRIS, as surety for Faribault Mills Inc., as surety for Faribault Woolen Mill Company DebtorU.S. Department of Labor Appellee

v.Michael P. Harris Appellant

No. 17-1261

United States Court of Appeals, Eighth Circuit.

Submitted: February 15, 2018

Filed: August 3, 2018

SMITH, Chief Judge.

The United States Department of Labor (DOL) obtained a pre-bankruptcy judgment against debtor Michael Harris in federal district court. The judgment provided that, under the Employee Retirement Income Security Act of 1974 (ERISA), Harris breached his fiduciary duty when the company he managed as the chief executive officer (CEO) failed to remit funds withheld from its employees' paychecks for their health insurance plan. The DOL filed an adversary proceeding in Harris's Chapter 7 bankruptcy to have that judgment debt declared nondischargeable as a debt for defalcation while acting in a fiduciary capacity under 11 U.S.C. § 523(a)(4). The bankruptcy court granted summary judgment in the DOL's favor, declaring the debt nondischargeable.

The Eighth Circuit Bankruptcy Appellate Panel (BAP) affirmed the bankruptcy court's grant of summary judgment in the DOL's favor. Harris appeals, arguing that he (1) was not acting in a fiduciary capacity under § 523(a)(4) when the alleged defalcation occurred, and (2) did not act with the intent required for defalcation under § 523(a)(4). We affirm.

I. Background¹

A. Healthcare Plan

In 2001, Harris became CEO, President, and Chairman of the Board of Directors of Faribault Woolen Mills Company ("Faribault"), a blanket manufacturer. He owned 0.3 percent or less of Faribault's outstanding stock and had common options.

Faribault sponsored the Faribault Woolen Mills, Inc. Fully Insured Hospital Life Welfare Plan ("Plan") to provide health insurance for its employees. The Plan contracted with HealthPartners Health Insurance Company ("HealthPartners") to provide healthcare benefits for Plan participants. Employee contributions funded 100 percent of the health insurance premiums. The premiums were due to HealthPartners on the first of every month to provide insurance coverage for that month. Faribault withheld the health insurance premiums from the employee-participants' paychecks and then remitted the amount owed to HealthPartners from its general operations account on the first of each month. (Faribault also paid its general corporate expenditures from the same general operations account.) Harris knew that the payments were due monthly.

Gary Glienke, Faribault's Vice President of Human Resources, was responsible for receiving and rectifying the bills from HealthPartners for the health insurance premiums. He then sent the bills to Carla Craig, Faribault's Accounts Payable Administrator. From January 2008 to April 1, 2009, Harris, Glienke, and Faribault Chief Financial Officer (CFO) Carmen Dorr all had signatory authority on the general operating account, payroll account, and other Faribault accounts.

In 2008, HealthPartners notified Faribault via letter that the health insurance premiums were past due for January, February, March, April, May, June, August, September, October, and December. When Glienke received these letters, he alerted Harris that the premiums were past due and had to be paid. Harris then usually asked Glienke to see if he could obtain an extension on payment.

On at least two occasions in 2008—January 29 and November 26—Faribault issued checks to HealthPartners that Harris had signed that were subsequently returned by Faribault's bank to HealthPartners due to insufficient funds. Following the return of those checks, Faribault ultimately remitted payment of the insurance premiums to HealthPartners without loss of Plan insurance coverage.

Faribault issued a check on January 27, 2009, signed by Harris, to HealthPartners for $22,593.02 to pay Plan premiums owed for January 2009. That check also bounced. In a letter dated February 28, 2009, HealthPartners informed Glienke that the January check had bounced and that it would cancel the Plan if Faribault did not pay in full. That same day, HealthPartners also sent letters to the Plan participants, informing them that Faribault did not pay in full. As a Plan participant himself, Harris received that letter. Glienke also testified that when he received letters like the February 28 letter, he would inform Harris of it.

Meanwhile, on February 27, 2009, Faribault issued a check that Harris signed to HealthPartners for $19,466.91 to pay the February 2009 Plan premiums. HealthPartners returned the February 27 check to Faribault. In an accompanying letter dated March 3, 2009, HealthPartners informed Dorr, Faribault's CFO, that it would accept only wire payments due to Faribault's prior insufficient-funds checks.

On March 26, 2009, Harris contacted HealthPartners and requested a payment extension of the Plan premiums for January and February 2009. HealthPartners denied the request and demanded payment of the full two months' worth of premiums by March 31, 2009. When Faribault did not remit the overdue payments, HealthPartners canceled the Plan's insurance policy on April 1, 2009, retroactive to January 31, 2009, due to non-payment of premiums. Faribault thus never remitted $55,040.61 withheld from its employees' paychecks for insurance premiums from January 9, 2009, to March 20, 2009. Forty-two employees (and some of their families) were affected by the Plan's cancellation.

Also from January to March 2009, Faribault issued checks to other creditors from the general operations account containing commingled Plan premiums. For instance, between March 26 and March 31, 2009, over $70,000 was either transferred to Faribault accounts or was used to pay creditors and expenses. This amount includes several payments that were made to Harris's personal accounts, such as (1) a March 27, 2009 wire transfer for $1,500 made from Faribault's general operations account to Harris and his wife's account; (2) a March 30, 2009 payment of $4,000 made at Harris's direction from Faribault's general operations account to Harris's American Express account; and (3) a March 31, 2009 payment of $21,531.48 made from Faribault's general operations account on Harris's home equity line of credit. Importantly, Harris asked Dorr to make the March 31 payment despite having been informed by Dorr that Faribault could not make the full HealthPartners Plan premium payment that was due.

Harris lost control of Faribault's finances sometime after March 2009, and he resigned as CEO in May 2009. Faribault was later liquidated.

B. District Court Proceedings

On December 12, 2012, the DOL filed a complaint against Harris in federal district court, alleging that he violated ERISA. Specifically, the DOL asserted Harris failed to remit the $55,040.61 in withheld employee earnings to pay for the Plan's healthcare premiums to HealthPartners. The DOL alleged that Harris's failure to use the employees' withheld wages to pay the HealthPartners premium breached his duty of loyalty to the Plan participants, in violation of ERISA § 404(a)(1)(A), 29 U.S.C. § 1104(a)(1)(A).

Following a bench trial, the district court held that Harris breached his fiduciary duty of loyalty under ERISA. The court found that Harris diverted $55,040.61 in employee contributions intended for insurance premiums to pay corporate expenses and his own home-equity loan. The district court first determined that Harris acted as an ERISA fiduciary. Harris served in a fiduciary capacity in the handling of his employees' withheld—but unremitted—contributions to the Plan to pay Plan premiums. According to the court, the amounts withheld from Faribault employees' paychecks for Plan premium payments became " ‘plan assets,’ and they became so as of the date on which the employees' wages were paid (i.e., the date on which the employees' contributions were withheld)." Perez , 2015 WL 6872453, at *10. The court also found "that Harris exercised authority or control respecting the management or disposition of those plan assets." Id. As an example, the district court cited Dorr's testimony "that she did not have the authority, without Harris's approval, to remit employee contributions to HealthPartners. Indeed, the checks to HealthPartners were signed by Harris." Id. Additionally, the court noted that "when Glienke brought HealthPartners's past-due notices to Harris's attention, Harris asked Glienke to try to get an extension—or, in March 2009—called HealthPartners himself to request an extension." Id. The court concluded "that Harris was a fiduciary to the Health Plan from at least January 1, 2009[,] to March 31, 2009," because he exercised authority and control over plan assets during that time. Id. at *11.

Second, the district court found "that Harris breached his duty of loyalty to the Health Plan by failing to remit plan assets to the Health Plan and instead using those assets to pay corporate creditors and personal expenses." Id. at *12. Specifically, the court determined that Harris breached his duty of loyalty "when, in late March 2009—after he claims he first learned that the January and February premiums had not been remitted to HealthPartners—he directed or allowed funds from [the general operations account] to be used to pay Faribault Mills's expenses and debts instead of the HealthPartners premiums." Id.

The district court determined that Harris's fiduciary breach caused the $55,040.61 in losses that the Plan suffered. The court characterized the evidence as showing "that an amount of money significantly higher than the amount of premiums that was due to HealthPartners was removed from the account from which premiums were paid and was neither paid to HealthPartners nor returned to the employees, but instead was used to pay other corporate expenses or debts." Id. The district court found Harris liable to the Plan for $55,040.61 in restitution and, with prejudgment interest, awarded a total of $67,839.60. Harris did not...