The Bankruptcy Hotline

Debt Owed for Unpaid Benefit Fund Contributions Is Dischargeable

In an issue of first impression in the Tenth Circuit, the court held that even though the owners of a company failed to make contributions to the employee benefit funds of its employees, the owners were not fiduciaries under the Employee Retirement Income Security Act and therefore the debt was dischargeable in bankruptcy. Navarre v. Luna (In re Luna), No. 03-7060 (May 3).

The court found that while the contractual right to the unpaid contributions is an “asset” under ERISA, the owners of the company did not qualify as ERISA fiduciaries as they did not exercise authority or control over the plan assets at issue. Noting that an employer does not become an ERISA fiduciary by merely breaching its contractual obligations to a fund, the court stated that “ERISA's definition of “fiduciary” is broad but not all-encompassing. Every employer in some sense has discretion in meeting its obligations. But discretion alone does not confer fiduciary status under ERISA. If it did, any obligor to an employee benefit plan could become an ERISA fiduciary.” Consequently, the court was not willing “to expand ERISA beyond its plain meaning and hold that the officers of a company who contract with an ERISA-covered fund automatically become fiduciaries under the Bankruptcy Code.”

Retirement-Eligible Executives are 'Retirees' under ' 1114

The Third Circuit has ruled that the retirement eligible senior executives of a bankrupt company qualify as “retirees” under ' 1114 and their benefits plans could not simply be rejected as executory contracts pursuant to ' 365. General DataComm Industries, Inc. v. Arcara (In re General DataComm Industries, Inc.), No. 041710 (May 16).

In affirming the bankruptcy and district courts, the appellate court held that “the deliberate and involuntary termination of an employee on the verge of retirement, where the employee has otherwise met all qualifications for retirement, cannot deprive such an employee of the procedural protections of ' 1114.” Further, that because the appellees are “retired employees” within the meaning of ' 1114, the benefit plan providing retirement benefits to such employees was an executory agreement and could not be rejected pursuant to ' 365.

Debt Owed for Unpaid Benefit Fund Contributions Is Dischargeable

In an issue of first impression in the Tenth Circuit, the court held that even though the owners of a company failed to make contributions to the employee benefit funds of its employees, the owners were not fiduciaries under the Employee Retirement Income Security Act and therefore the debt was dischargeable in bankruptcy. Navarre v. Luna (In re Luna), No. 03-7060 (May 3).

The court found that while the contractual right to the unpaid contributions is an “asset” under ERISA, the owners of the company did not qualify as ERISA fiduciaries as they did not exercise authority or control over the plan assets at issue. Noting that an employer does not become an ERISA fiduciary by merely breaching its contractual obligations to a fund, the court stated that “ERISA's definition of “fiduciary” is broad but not all-encompassing. Every employer in some sense has discretion in meeting its obligations. But discretion alone does not confer fiduciary status under ERISA. If it did, any obligor to an employee benefit plan could become an ERISA fiduciary.” Consequently, the court was not willing “to expand ERISA beyond its plain meaning and hold that the officers of a company who contract with an ERISA-covered fund automatically become fiduciaries under the Bankruptcy Code.”