A series of recent federal court decisions have held that company owners and other fiduciaries who violate ERISA by misusing employee contributions to benefit plans cannot avoid repaying the resulting losses by filing for bankruptcy. In Solis v. Dombek, No. 12-cv-02992, (N.D. Ill. 2012), the U.S. Department of Labor brought suit against John Dombeck III and John Dombeck Jr. for mismanaging employee benefit plan funds. John Dombeck III was president and part owner of the company sponsoring a 401(k) plan and a group health plan, as well as a signatory on the company’s accounts. John Dombeck Jr. was vice-president and part owner of the company, as well as the 401(k) plan’s trustee.
As a part of the company’s employee benefit plans, the company withheld funds from each employee’s paycheck to contribute to the group health plan and the 401(k) retirement plan. However, as the lawsuit alleged, the defendants failed to actually remit the withheld funds to either the health care provider or to the retirement plan. Instead, the defendants incorporated the employee’s voluntary salary contributions into the company’s assets. This mismanagement of the company’s employee benefit plans constituted a violation of the Employee Retirement Income Security Act (ERISA). On November 28, 2012, the United States District Court for the Northern District of Illinois ordered the defendants repay a total of $69,521.31 in health care premiums and retirement plan contributions.
This case was complicated by the fact that the defendants had previously filed for Chapter 7 bankruptcy protection. As a result of this bankruptcy filing, the Department of Labor filed separate complaints in the United States Bankruptcy Court for the Northern District of Illinois seeking a determination that these debts were not dischargeable in bankruptcy. On October 5, 2012, and October 16, 2012, the bankruptcy courts held that the debts were not dischargeable in bankruptcy. In re Dombek Jr., No. 11-40896, 2012 WL 4757832 (Bankr. N.D. Ill Oct. 5, 2012); In re Dombeck III, No. 11-40894, 2012 WL 4959442 (Bankr. N.D. Ill. Oct. 16, 2012).
The bankruptcy courts based their decision that the debts were not dischargeable in bankruptcy on 11 U.S.C. § 523(a)(4), which provides that a debt is not dischargeable if it was incurred as a result of “defalcation while acting in a fiduciary capacity.” Defalcation is similar to fraud or embezzlement, but the level of culpability required is something more than negligence but less than fraud. The court held that the “failure to monitor or ensure the remittance of employee contributions … constitutes a defalcation by Defendant while acting in a fiduciary capacity” for the employee benefit plans. Thus, the $69,521.31 the defendants must repay to the plans could not be discharged in bankruptcy.
This case serves two important reminders. First, company owners and managers that oversee employee benefit plans or their assets must ensure that employee contributions and plan assets are deposited, remitted, and used appropriately. Second, fiduciaries who mismanage plan assets face significant liability and will be responsible for the repayment of any losses. The duty to repay these losses cannot be avoided and discharged in bankruptcy.
Fraser Stryker is a leader in employee benefits law. Attorneys in the Firm’s Employee Benefits Practice Group advise individuals, business entities, governments, and nonprofit/tax-exempt organizations on a wide variety of employee benefits matters and transactions. Fraser Stryker works with employers to implement and maintain employee benefit plans that help attract and retain top talent. For more information on employee benefit plan management and fiduciary responsibilities, please contact Nicole R. Konen, or Alexander Boyd.
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