Case No. 06-54797, Adv. P. No. 07-4051.
February 8, 2008
OPINION GRANTING IN PART AND DENYING IN PART PLAINTIFFS' AMENDED MOTION FOR SUMMARY JUDGMENT
This matter is before the Court on Plaintiffs' Motion for Summary Judgment. Plaintiffs seek judgment on a three-count complaint alleging nondischargeability of $14,467.77 in delinquent fringe benefit contributions, and $29,671.20 in vacation pay. Plaintiffs contend the debt is nondischargeable pursuant to 11 U.S.C. § 523(a)(2) (misappropriation) and § 523(a)(4) (defalcation in a fiduciary capacity).
A hearing on Plaintiffs' Motion was held on January 8, 2008. While the Court ruled in Plaintiffs' favor on certain legal issues, other issues remained unclear, and the Court asked the parties to file amended pleadings. The Court issues the present Opinion granting in part and denying in part Plaintiffs' amended Motion for Summary Judgment based on the amended pleadings.
Defendant/debtor is representing himself in this proceeding and has not filed any responsive pleadings or other documents to rebut Plaintiffs' allegations.
I. Factual Background
Debtor/Defendant Daniel Read Edgar is the sole owner and officer of Alpine Contractors, Inc., a concrete and excavating company. Alpine entered into certain collective bargaining agreements ("CBAs") "which required it to make fringe benefit contributions directly to Plaintiff funds for, and on behalf of, Alpine employees covered by the CBAs. In addition, vacation pay was to be deducted by the employer from an employee's gross wages and turned over to Plaintiffs for the express benefit of the employee. (The vacation pay, along with certain other payroll-deducted items, will be referred to as "withheld pay" or "vacation pay").
Trust Agreements establishing each separate employee benefit trust fund which collectively constitute the Cement Masons' Fringe Benefits Fund, the Detroit Laborers' Fringe Benefit Fund, the Operating Engineers' Fringe Benefit Fund and the Detroit Carpenters' Fringe Benefit Fund are incorporated into the collective bargaining agreements.
Between June, 2004 and April, 2006, Alpine did not make all of the fringe benefit contribution payments it was required to make under the CBAs relating to two non-public construction projects: the Wal-Mart Ft. Gratiot project, and the Sam's Club-Novi project. Alpine's general contractor on those projects was Micco Construction, Inc. It is undisputed that Defendant and/or Alpine received substantial payments from Micco on both projects: $263,250 on the Ft. Gratiot project, and $353,050 on the Novi project. Plaintiffs contend that between November 15, 2005 and March 30, 2006, Defendant diverted the funds received from the general contractor (Micco) to his own use and to another company owed by Defendant, Atsina Corporation. Plaintiffs believe that Defendant diverted $37,914.35 to himself and $16,257.72 to Atsina Corporation.
According to Keith Messing, an accountant who audited Alpine's payroll books and records, Defendant owes the Funds unpaid fringe benefit contributions (for covered employees on the Fort Gratiot and Sam's Club projects) in the amount of $14,467.77. (Plaintiffs' Ex. 3).
As a separate matter, Plaintiffs allege, and Defendant does not dispute, that Alpine withheld vacation and other pay from employees' paychecks, but did not forward all of the withheld pay to the Plaintiffs as required by the CBAs. Plaintiffs allege that they are owed $29,671.20 in withheld pay. (Plaintiffs' Ex. 3, Affidavit of Keith Messing). While Defendant disputed that amount at the January 8, 2008 hearing, he has proffered no evidence to support his claim that Plaintiffs' records are incorrect.
On October 16, 2006, debtor Daniel Edgar filed a voluntary chapter 7 bankruptcy petition. On January 16, 2007, Plaintiffs filed the present adversary proceeding against Debtor seeking a determination that he is personally liable for the unpaid fringe benefit contributions and withheld pay in connection with the operation of Alpine, and that the liability is not dischargeable in bankruptcy.
Plaintiffs' Complaint has three counts: Count I asserts that Defendant violated the Michigan Building Contract Fund Act, M.C.L. § 570.151, et. seq. (referred to as the "Michigan Builders Trust Fund Act" or "the Act") giving rise to a nondischargeable debt under 11 U.S.C. § 523(a)(4) for defalcation while acting in a fiduciary capacity. Count II asserts that Debtor misappropriated the withheld pay which constitutes a defalcation while acting in a fiduciary capacity and false representation. Debts arising from fiduciary defalcation and misrepresentation are nondischargeable pursuant to 11 U.S.C. §§ 523(a)(4) and (a)(2). Count III asserts that Debtor's failure to ensure that Alpine paid the fringe benefits contributions as they accrued constituted a breach of fiduciary duty under ERISA, rendering the debt nondischargeable pursuant to 11 U.S.C. § 523(a)(4). Based on recent case law from the Sixth Circuit Court of Appeals ( Ohio Carpenters' Pension Fund et. al. v. Bucci (In re Bucci), 492 F.3d 635 (6th Cir. 2007)), Plaintiffs limit their ERISA-based breach of fiduciary duty claim to withheld pay.
Bankruptcy courts have jurisdiction over all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11. 28 U.S.C. §§ 1334 157. Core proceedings include proceedings to determine dischargeability. 28 U.S.C. § 157(b)(2)(I).
III. Standard for Summary Judgment
Fed.R.Civ.P. 56(c) for summary judgment is incorporated into Fed.R.Bankr.P. 7056(c). Summary judgment is only appropriate when there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The central inquiry is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986). After adequate time for discovery and upon motion, Rule 56(c) mandates summary judgment against a party who fails to establish the existence of an element essential to that party's case and on which that party bears the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
The movant has an initial burden of showing "the absence of a genuine issue of material fact." Celotex, 477 U.S. 317, 323. A "genuine" issue is one where no reasonable fact finder could return a judgment in favor of the non-moving party. Berryman v. Reiger, 150 F.3d 561, 566 (6th Cir. 1998) (citing Anderson, 447 U.S. at 248). Once the movant meets this burden, the non-movant "must do more than simply show that there is some metaphysical doubt as to the material facts. If the record taken in its entirety could not convince a rational trier of fact to return a verdict in favor of the non-moving party, the motion should be granted." Cox v. Kentucky Dept. of Transportation, 53 F.3d 146, 149-50 (6th Cir. 1995) (internal quotation marks and citation omitted).
The general rule of Chapter 7 bankruptcy is that a bankruptcy debtor's preexisting financial obligations are discharged and the debtor begins with a clean financial slate. There are, however, several exceptions to the general rule. Those exceptions include 11 U.S.C. § 523(a)(2), which excepts from discharge a debt obtained by false representation, and 11 U.S.C. § 523(a)(4) which excepts from discharge a debt arising from fraud or defalcation while acting in a fiduciary capacity.
To avoid the effect of a discharge, the burden is on the creditor to prove that the debt falls within the exception claimed. Hill v. Smith, 260 U.S. 592 (1923). A creditor must establish a § 523(a) exception by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279 (1991).
Count I: Michigan Building Contract Fund and Dischargeability under § 523(a)(4)
Count I of Plaintiff's Complaint alleges that Defendant had a fiduciary duty to Plaintiffs under the Michigan Building Contract Fund Act (MCL § 570.151 et. seq.). Plaintiffs contend that Defendant violated his fiduciary duty by failing to pay them amounts owed under the CBAs, and that the violations render Defendant's obligations to Plaintiffs nondischargeable under § 523(a)(4) of the Bankruptcy Code.
Under the Michigan Building Contract Fund Act, a contractor doing business in Michigan is prohibited from retaining or using construction payments from a particular project until all laborers, subcontractors, and materialmen have been paid. People v. Brown, 610 N.W.2d 234, 237 (Mich.Ct.App. 2000). In particular, § 570.151 of the Act provides that:
Sec. 1. In the building construction industry, the building contract fund paid by any person to a contractor, or by such person or contractor to a subcontractor, shall be considered by this act to be a trust fund, for the benefit of the person making the payment, contractors, laborers, subcontractors or materialmen, and the contractor or subcontractor shall be considered the trustee of all funds so paid to him for building construction purposes.
The effect of this statute is to impose a trust, with the contractor operating as the trustee, upon the funds paid by any person in connection with a building contract. Huizinga v. United States, 68 F.3d 139, 144 (6th Cir. 1995). And from a purely legal standpoint, it is proper to equate a violation of the Michigan Builder's Trust Fund Act to that of an act of defalcation while acting in a fiduciary capacity as applied to § 523(a)(4).
This Court, as well as others, in following precedent established by the Sixth Circuit Court of Appeals, has held that a contractor subject to M.C.L.A. § 570.151 is a fiduciary for purposes of § 523(a)(4). MPC Cash-Way Lumber Co. v. Collins (In re Collins), 266 B.R. 123, 128 (Bankr. N.D. Ohio 2000), citing Carlisle Cashway Inc. v. Johnson (In re Johnson), 691 F.2d 249, 257 (6th Cir. 1982). Additionally, once the existence of a fiduciary relationship is shown, the threshold to establish that an act of defalcation occurred is low. Defalcation, for purposes of § 523(a)(4), occurs whenever a debtor misappropriates or fails to properly account for those funds held in trust; a showing of a debtor's wrongful intent is not required. R.E. America, Inc. v. Garver (In re Garver), 116 F.3d 176, 180 (6th Cir. 1997).
In re Cousino, 361 B.R. at 293 (footnote omitted).
The prima facie elements of a civil cause of action brought under the Act include (1) the defendant is a contractor or subcontractor engaged in the building construction industry, (2) a person paid the contractor or subcontractor for labor or materials provided on a construction project, (3) the defendant retained or used those funds, or any part of those funds, (4) for any purpose other than to first pay laborers, subcontractors, and materialmen, (5) who were engaged by the defendant to perform labor or furnish material for the specific project. DiPonio Constr. Co., Inc. v. Rosati Masonry Co., Inc., 246 Mich. App. 43, 49 (Mich.App. 2001).
A corporate officer may be civilly liable under the Michigan Builders Contract Fund Act. Trustee's of the Michigan Regional Counsel of Carpenters Employee Benefits Fund v. Accura Concrete Walls, Inc., 408 F.Supp.2d 370, 372-73 (E.D. Mich, 2005), relying on Au Bon Pain Corp. v. Artect, Inc., 653 F.2d 61 (2d Cir. 1981) and People v. Brown, 610 N.W.2d 234 (Mich.Ct.App. 2000).
As a preliminary matter, Plaintiffs must show that they have standing to bring a cause of action under the Michigan Builders Contract Fund Act. Plaintiffs must show that they are part of the class intended to be protected by the Act. Plaintiffs in the present case are not "contractors, laborers, subcontractors or materialmen", as those terms are commonly understood. In the general context of bankruptcy (and in the more specific context of nondischargeability), it is not obvious to the Court that granting standing to fringe benefit funds furthers the purpose behind the Michigan Builders' Contract Fund Act. Nevertheless, money paid to such funds by employers is generally viewed as related to wages, and there is case law in the Sixth Circuit which treats such funds as beneficiaries under the Act. See e.g. Trustees v. Accura Concrete Walls, Inc., 408 F.Supp.2d 370 (E.D. Mich. 2005); Operating Engineers Local 324 v. Harabedian Paving Co., 875 F.Supp. 406 (E.D. Mich. 1995); Detroit Metro. Area Executive Comm. Of the Bricklayers, Masons and Plasterers Union of America v. Leto Construction, 423 F.Supp. 701 (E.D. Mich. 1976). Thus, the Court concedes that Plaintiffs have standing as beneficiaries under the Fund. Defendant's standing as a contractor and fiduciary under the Fund is not disputed.
The first element of a cause of action under the Trust Fund Act is that Defendant must be a contractor or subcontractor engaged in the building construction industry. There is no dispute as to this fact.
Next, Plaintiffs must show that payments received by Alpine and/or Defendant on a specific project (i.e. the funds deemed to be held in trust for the benefit of contractors working on that project) were not, in fact, paid to contractors, laborers, or materialmen on the specific project, but were instead diverted for other purposes. In the present case, it is undisputed that Alpine received payments from Micco totaling $263,250 on the Ft. Gratiot project and $353,050 on the Novi project. It is also undisputed that Plaintiffs, as beneficiaries under the Act, did not receive all of the fringe benefits contributions owed on behalf of workers on those projects. Plaintiffs assert that they are owed $14,467.77. The issue is: were the payments received by Defendant from Micco diverted for other purposes, or were the payments received from Micco insufficient to pay all of the laborers and suppliers? If Defendant received insufficient funds to pay all of the contractors and suppliers on a particular job (as, for example, when a job is underbid, and a contractor's expenses exceed payments received), the resulting non-payment of amounts owed to other contractors, suppliers, or in this case the Plaintiff funds, would not be a nondischargeable debt because the failure to pay was not the result of a wrongful diversion of trust funds — Defendant may simply have run out of money.
Because Defendant does not dispute the fact that he and/or Alpine received payments from Micco on the Ft. Gratiot and Novi projects, the issues at trial will be limited to: (1) whether Defendant utilized the funds received for proper purposes and simply ran out of money, or whether Defendant diverted the funds for his own use, and (2) damages.
Count II: Breach of Fiduciary Duty (§ 523(a)(4)) and Withheld Pay
In Count II of the Complaint, Plaintiffs allege that Defendant breached a fiduciary duty by withholding from employee paychecks employee contributions to a pooled vacation fund administered by Plaintiffs pursuant to the CBA, and failing to turn those funds over to Plaintiffs. While the fiduciary obligation is owed by Defendant to his employees, rather than to the Plaintiff funds, Defendant appears to concede that Plaintiff stands in the shoes of the employees for purposes of enforcing the fiduciary obligations. Defendant's fiduciary duty to his employees to account for the money directly withheld from employees' paychecks is a separate and distinct duty from that which arises under the Michigan Builder's Contract Fund Act.
The Sixth Circuit has defined the term "fiduciary capacity" as used in § 523(a)(4) narrowly, holding that the term applies only to express or technical trust relationships, where a specific property is placed in the hand of the debtor as trustee. In re Garver, 116 F.3d 176, 179 (6th Cir. 1997). In other words, the term "fiduciary" as used in § 523(a)(4) does not apply to implied trusts. Garver 116 F.3d at 178-79. "There are four requirements for establishing the existence of an express or technical trust: (1) an intent to create a trust; (2) a trustee; (3) a trust res; and (4) a definite beneficiary." Graffice v. Grim (in re Grim), 293 B.R. 156, 166 (Bankr. N.D. Ohio 2003). "[T]he defalcation provision of § 523(a)(4) is limited to only those situations involving an express or technical trust relationship. Defalcation then occurs through the misappropriation or failure to properly account for those trust funds." Garver, 116 F.3d at 180 (citations omitted). Defalcation encompasses "embezzlement, the `misappropriation of trust funds held in any fiduciary capacity,' and the `failure to properly account for such funds.'" Capitol Indemnity Corp. v. Interstate Agency, Inc. (In re Interstate Agency), 760 F.2d 121, 125 (6th Cir. 1985) (citations omitted). See also In re Blaszak, 397 F.3d 386 (6th Cir. 2005).
In the present case, Defendant does not rebut Plaintiffs' assertion that vacation pay was deducted from employees' wages, or that Defendant's obligations with regards to vacation pay is controlled by specific trust agreements. While those agreements were not specifically provided to the Court, Defendant implicitly acknowledges them in his Answers to Plaintiffs' Interrogatories. (Plaintiffs' Ex. 1, attached to Plaintiffs' Original Motion for Summary Judgment).
The Court finds that Defendant's failure to turn over vacation pay directly withheld from his employees' paychecks is defalcation while acting in a fiduciary capacity as defined by 11 U.S.C. § 523(a)(4). Plaintiffs are, therefore, entitled to summary judgment on Count II of Plaintiffs' Complaint. An affidavit filed by Plaintiffs in support of their Motion indicates that Defendant failed to remit $29,671.20 in vacation pay directly withheld from employees' wages. (Plaintiffs' Amended Motion, Ex. 3). At the January 8, 2008 hearing, Defendant questioned the amount of vacation pay for which he could be held liable. However, Defendant has failed to produce any affidavits or documents to rebut the figures set forth in Plaintiffs' affidavit. Plaintiffs are, therefore, entitled to judgment on Count II in the amount of $29,671.20.
Count II: Misappropriation of Withheld Pay under §§ 523(a)(2)
Count II of Plaintiffs' Complaint alleges that Defendant misappropriated money withheld from employees' gross wages by not turning the money over to Plaintiffs as required by the CBAs. Plaintiffs contend that this constitutes fraud under § 523(a)(2). 11 U.S.C. § 523(a)(2) excepts from discharge any debt "for money, property, [or] services . . . to the extent obtained by false pretenses, a false representation, or actual fraud . . ." It covers oral fraud (§ 523(a)(2)(A)) as well as written fraud (§ 523(A)(2)(B)). To prevail on a claim under this section, a plaintiff must show that:
(1) [T]he debtor obtained money through a material misrepresentation that at the time the debtor knew was false or that he made with reckless disregard for the truth; (2) the debtor intended to deceive; (3) the creditor justifiably relied on the false representation; and (4) its reliance was the proximate cause of loss.
The purpose of § 523(a)(2) is to prevent debtors from retaining the benefits of property obtained through fraud. In re Omegas Group, Inc., 16 F.3d 1443, 1451 (6th Cir. 1994). Plaintiff must show each element by a preponderance of the evidence. Rembert, 141 F.3d at 281. Fraud must be plead with specificity. In re Schwartzman, 63 B.R. 348, 355 (Bankr. S.D. Ohio, 1986).
In the present case, Plaintiffs allege that by withholding money from employees' paychecks with the understanding that the money would be passed to the Plaintiffs, and then failing to pass the money on to the Plaintiffs, Defendant obtained the withheld vacation pay under false pretenses in violation of § 523(a)(2). Because Plaintiffs are entitled to summary judgment as to the vacation pay under 11 U.S.C. § 523(a)(4), the Court need not address the issue of whether Defendant's conduct with respect to the withheld funds constitutes fraud pursuant to 11 U.S.C. § 523(a)(2). The Court will not take any testimony with regards to this issue at trial.
Count III: ERISA and Dischargeability under § 523(a)(4)
In Count III of Plaintiffs' Complaint, Plaintiffs allege that ERISA imposes a fiduciary duty on Defendant to ensure that Alpine paid fringe benefit contributions to Plaintiffs as they accrued, and that Defendant's failure to do so violates ERISA ( 29 U.S.C. §§ 1145 and 1109(a)) and constitutes a defalcation while acting in a fiduciary capacity rendering the debt nondischargeable pursuant to 11 U.S.C. § 523(a)(4).
The Sixth Circuit Court of Appeals has recently held that being a fiduciary under ERISA does not automatically satisfy the fiduciary capacity requirement of § 523(a)(4). Bd. Of Tr. of Ohio Carpenters' Pension Fund et. al. v. Bucci (In re Bucci), 492 F.3d 635 (6th Cir. 2007). Thus, even in the context of ERISA contributions, the Court must determine whether Defendant was acting in a fiduciary capacity with respect to the contributions and withheld payments using the common law elements required under § 523(a)(4) — an analysis set forth above.
In light of the Bucci case, Count III of Plaintiff's' Complaint effectively restates the parts of Counts I and II as to nondischargeability under 11 U.S.C. § 523(a)(4), and does not state a separate cause of action. Count III is dismissed.
For the foregoing reasons, Plaintiffs' Motion for Summary Judgment is denied on Count I (the issues of diversion and damages remain for trial), granted on Count II pursuant to § 523(a)(4) in the amount of $29,671.20, and denied on Count III. Count III is dismissed.