How to Keep Trust Fund Delinquencies From Being Discharged in Bankruptcy

When a contributing employer files for Chapter 7 bankruptcy, they are generally entitled to a discharge of their debts as part of the liquidation of their estate.  In this way, Chapter 7 is different from other common types of bankruptcy, such as Chapter 11 and Chapter 13, which require the bankrupt debtor to file a plan and reorganize under the plan but do not provide a blanket discharge.

When a Trust Fund is owed money by an employer who files for Chapter 7, the only way to avoid having that debt discharged is to show that the debt is not dischargeable under certain exceptions provided in Section 523 of the Bankruptcy Code.  This is not possible when the entity filing for Chapter 7 is a corporation since corporations do not receive a discharge in bankruptcy.  If you are owed money by a corporation that has filed for bankruptcy, you should contact your Fund Counsel as soon as possible to recoup as much as you can via the claims process.

However, if the entity filing for Chapter 7 is an individual, sole proprietor, or other non-corporation, your Fund Counsel may be able to argue that the debt is not dischargeable because the bankrupt employer committed fraud, fiduciary defalcation, embezzlement, or willful and malicious injury.  With respect to defalcation, which requires a showing that the debtor is a fiduciary, the U.S. Supreme Court has recently opined on the state of mind requirement.  In Bullock v. Bankchampaign, decided on May 13, 2013, the U.S. Supreme Court held that defalcation includes a culpable state of mind requirement involving knowledge of, or gross recklessness with respect to, the improper nature of the fiduciary behavior.  The Bullock case did not involve ERISA-protected Trust Funds and the question of how Bullock will be applied in ERISA cases has not yet been answered.  However, if your Fund Counsel is able to succeed in a nondischargeability action, the entire debt will not be discharged and will survive the debtor’s bankruptcy proceedings.

Because an employer who files for bankruptcy is automatically entitled to the protections of the bankruptcy code, it is important for Trust Funds to be candid with employers regarding the consequences of failing to make contributions, and, if possible, to clarify that unpaid contributions belong to the funds rather than to the employer.  The best option would be an amendment to plan language.  For assistance regarding ways in which this can be accomplished, please contact your Trust Fund counsel.

By Jolene Kramer | July 15, 2013

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