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Pension Withdrawal Liability Is Dischargeable In Bankruptcy

Under the Bankruptcy Code, an individual forced to declare personal bankruptcy cannot escape liability for certain debts that Congress has designated as “non-dischargeable.” Among these are debts arising from the breach of a “fiduciary” duty, such as the obligation a trustee has to the beneficiaries of a trust. Fiduciary duties may be created by contract (such as a trust agreement used in estate planning) or by statutes (such as state or federal tax laws that make an employer a “trustee” for the taxes withheld from an employee’s payroll check). Parties sometimes disagree about whether a particular duty creates a “fiduciary” obligation, or merely a “legal” or “contractual” obligation that can be discharged in bankruptcy.

The Ninth Circuit United States Court of Appeals resolved just such a disagreement in a case decided this summer. In Carpenters Pension Trust Fund of Northern California v. Moxley, ___F.3d ___ (9th Cir. 2013), the Appeals Court ruled that a debtor’s obligation to pay a withdrawal liability assessment to a multi-employer union pension fund was not a fiduciary obligation, but merely contractual, and therefore, could be discharged in the employer’s Chapter 7 bankruptcy case. The Court rejected the Carpenters Fund’s argument that a withdrawal liability assessment should be treated for bankruptcy dischargeability purposes the same as a claim for unpaid pension contributions accrued during a past payroll period.

Michael Moxley withdrew from the Carpenters Fund (Fund) in 2005. His withdrawal liability assessment was $172,000. His small cabinet installation business was unable to pay the assessment, and Moxley filed a Chapter 7 personal bankruptcy in 2008. However, the Fund filed suit in the Bankruptcy Court to have Moxley’s personal obligation to pay the withdrawal liability declared a non-dischargeable breach of fiduciary duty, or “defalcation” claim under 11 U.S.C. 523(a)(4). The Fund’s argument was that under the carpenters union’s collective bargaining agreement, to which Moxley was a party, claims for pension contributions constituted trust fund claims for which Moxley was personally liable as a fiduciary. The Fund argued further that a withdrawal liability assessment and an unpaid contribution claim are treated, for many purposes, as the same under the Employee Retirement Income Security Act of 1974 (ERISA). Therefore, according to the Fund, Moxley’s failure to pay the withdrawal assessment should be just as much a breach of his fiduciary duty as would a failure to pay a pension contribution for a past payroll period.

The Ninth Circuit rejected the Fund’s argument. The Appeals Court distinguished the duty to pay a pension contribution from the duty to pay a withdrawal liability assessment, based on the different origins of these duties. The duty to pay current pension contributions arises under a collective bargaining agreement which creates an express fiduciary duty on the employer’s part to make ongoing contributions. The duty to pay withdrawal liability, however, arises not under the collective bargaining agreement, but under ERISA itself. Because ERISA does not specifically provide that withdrawal assessments give rise to fiduciary obligations, claims for such assessments are dischargeable under the Bankruptcy Code. 

©2022 MICHAEL BEST & FRIEDRICH LLPNational Law Review, Volume III, Number 287
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About this Author

Ann Ustad Smith, Michael Best Law Firm, Finance and Banking Attorney
Partner, Practice Chair

Ann works with business owners, investors, and lenders, establishing and navigating their financial relationships and resolving matters relating to financial distress. Her practice is focused on commercial transactions, commercial litigation, bankruptcy, and other insolvency situations, and she is known for:

  • Structuring and closing complex financial transactions

  • Practical, effective solutions to distressed financial situations

  • Resolving (including through...

608-283-2251
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