Unpaid Plan Contributions Can Be Discharged in Bankruptcy

The 9th U.S. Circuit Court of Appeals has ruled that unpaid contributions to a multiemployer benefit plan are best classified as the contractual right to bring a claim against an employer for delinquent payment, and since a plan member employer has no control over such right, it is not considered a fiduciary under the Employee Retirement Income Security Act (ERISA) and likewise under the bankruptcy code.

The appellate court held that the unpaid contributions could be discharged in bankruptcy.

Gregory Bos was owner and president of Bos Enterprises, Inc. (BEI), which was bound by the Carpenters’ Master agreement, a multiemployer benefit plan. Between 2007 and 2009, Bos had trouble paying the required monthly contributions to the plan. In March 2009, he signed a promissory note personally guaranteeing payment of $359,592.09 to the fund, but failed to pay. The board of trustees of the fund filed a grievance against Bos and BEI, and an arbitrator granted the board an award of $504,282.59.

In 2011, Bos filed for Chapter 7 bankruptcy, and the board of trustees contested the dischargeability of the debt, arguing that Bos committed defalcation while acting as a fiduciary of the fund.

The 9th Circuit noted that it has consistently held that unpaid benefit fund contributions are not plan assets. It pointed out that the circuits were split on the issue.  In Navarre v. Luna, the 10th U.S. Circuit Court of Appeals held that unpaid contributions are plan assets because, although the benefit fund may not have a "present interest" in the contributions at the time they became delinquent, the fund holds a "future interest" in the contractually-owed contributions. "Under ordinary notions of property rights, although the plan did not own the contributions themselves, it did own a contractual right to collect them," Circuit Judge Timothy Tymkovich wrote for the 10th Circuit. However, the owners did not qualify as ERISA fiduciaries because they did not exercise authority or control over the management or disposition of the plan assets.

In a 6th Circuit case, Board of Trustees of the Ohio Carpenters’ Pension Fund v. Bucci, the appellate court held that, even if a plan document could make the unpaid contributions plan assets, such a classification would impermissibly impose fiduciary status based on an act of wrongdoing because employers do not have sufficient control over the plan’s claim for the assets to confer fiduciary status under ERISA.

The 9th Circuit agreed with the 10th and 6th Circuits reasoning and remanded the Bos case back to bankruptcy court to discharge the $504,282.59 debt to the pension fund.

The 9th Circuit’s opinion in Bos v. Board of Trustees is here.