Employer Not Allowed to Avoid Trust Fund Delinquencies in Bankruptcy Proceeding

In June 2012, the Carpenters Trust Funds for Northern California obtained a judgment for over $500,000 against Greg Bos.  The unique thing about the judgment is that it was obtained in bankruptcy court, where Bos had filed a Chapter 7 case to discharge his debts.  As the principal of an installation company with a collective bargaining agreement with the Carpenters Union, Bos was in charge of making sure that contributions were made under the agreement for pension, health and welfare, and annuity funds for each hour worked.  At trial in the bankruptcy court, the Trust Funds argued that Bos himself personally owed a fiduciary duty  to the Funds as the person responsible for making contributions and deciding which bills the company paid.  The bankruptcy court determined that Bos fits the definition of a fiduciary, and that he had failed to live up to that duty. As a result, while Bos was permitted to discharge most of his debts, the debt to the Trust Funds was not discharged and instead a judgment was awarded to the Trust Funds.

Bos appealed the ruling, arguing that he was not personally a fiduciary to the funds.  Bos lost this appeal to the District Court. The critical fact is that the contributions are assets of the funds, so when Bos exercised control over them - in this case, by failing to pay them when due and instead using the money for other business and personal expenses - he was violating his fiduciary obligation.

For trust funds seeking to prevent employers from avoiding contribution obligations through bankruptcy, this and other similar recent decisions are crucial.  While bankruptcy protection permits the “honest but unfortunate” debtor to get a fresh start and wipe away debts, it does not allow for the discharge of debts incurred through failure to abide by a fiduciary duty.  As courts acknowledge that trust fund obligations are protected by this fiduciary obligation, benefit funds are finally receiving the protection the law intends from bankrupt employers seeking to avoid their obligations.

By Jordan Mazur

Legal Developments